UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
WASHINGTON,
D.C. 20549
FORM
10-K
(Mark
One)
x
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ANNUAL REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
fiscal year ended:
June 30, 2009
OR
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¨
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TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934
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For the
transition period from ____________________ to ____________________
Commission
file number:
0-21825
SMF
ENERGY CORPORATION
(Exact
name of registrant as specified in its charter)
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Delaware
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65-0707824
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(State
or other jurisdiction
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(I.R.S.
Employer
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of
incorporation or organization)
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Identification
No.)
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200
West Cypress Creek Road, Suite 400, Fort Lauderdale, Florida 33309
(Address
of principal executive offices) (Zip Code)
(954)
308-4200
(Registrant’s
telephone number, including area code)
Securities
registered pursuant to Section 12(b) of the Act:
Title of Class
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Name of exchange on which
registered
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Common
Stock, $.01 Par Value
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Nasdaq
Capital Market
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Securities
registered pursuant to Section 12(g) of the Act:
None
Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes
¨
No
x
Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes
¨
No
x
Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.
Yes
x
No
¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such
files). Yes
¨
No
¨
Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K (Section 229.405 of this Chapter) is not contained herein, and
will not be contained, to the best of registrant’s knowledge, in definitive
proxy or information statements incorporated by reference in Part III of this
Form 10-K or any amendment to this Form 10-K.
¨
Indicate
by check mark whether the registrant is a large accelerated filer,
an accelerated filer, a non-accelerated filer, or a smaller reporting
company. See definition of “accelerated filer
”,
“large
accelerated filer” and “smaller reporting company
”
in Rule 12b-2 of
the Exchange Act.
¨
Large accelerated
filer
¨
Accelerated
filer
¨
Non-accelerated
filer Smaller reporting company
x
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act).
Yes
¨
No
x
The
aggregate market value of the voting stock held by non-affiliates was
$515,497. The aggregate market value was computed by reference to the
last sale price of the registrant’s Common Stock on the Nasdaq Capital Market on
December 31, 2008.
As of
September 23, 2009 there were 38,498,544 shares of the Registrant’s Common Stock
outstanding.
DOCUMENTS
INCORPORATED BY REFERENCE:
Certain
Portions of Registrant’s Proxy Statement relating to the 2008 Annual Meeting of
Shareholders are incorporated by reference into Part III.
CAUTIONARY
STATEMENT REGARDING FORWARD-LOOKING STATEMENTS
From time
to time, we make statements concerning our expectations, beliefs, plans,
objectives, goals, strategies, future events or performance and underlying
assumptions and other statements that are not historical facts. These
statements are
“
forward-looking
statements” within the meaning of the Private Securities Litigation Reform Act
of 1995. Forward-looking statements include statements concerning our
expectations, plans, objectives, goals, strategies, future events, future
revenue or performance, capital expenditures, financing needs, plans or
intentions relating to acquisitions, business trends and other information that
is not historical information and, in particular, appear under the headings
“
Management's
Discussion and Analysis of Financial Condition and Results of Operations.” The
words
“
could,”
“
estimate,”
“
expect,”
“
anticipate,”
“
project,”
“
plan,”
“
intend,”
“
believe,”
“
goal,”
“
forecast” and
variations of such words or similar expressions are intended to identify
forward-looking statements. All forward-looking statements,
including, without limitation, management's examination of historical operating
trends, are based upon our current expectations and various
assumptions. Our expectations, beliefs and projections are expressed
in good faith and we believe there is a reasonable basis for
them. However, there can be no assurance that our expectations,
beliefs and projections will result or be achieved.
There may
also be factors that are not presently known to us or that we currently consider
to be immaterial that may cause our actual results to differ materially from the
forward-looking statements. Some of the risks and uncertainties that
could cause our actual results to differ materially from the forward-looking
statements are described in the section entitled “Risk Factors” in Item 1A, and
elsewhere in this Annual Report on Form 10-K. All forward-looking
statements and projections attributable to us or persons acting on our behalf
apply only as of the date of the particular statement, and are expressly
qualified in their entirety by the cautionary statements included in this report
and our other filings with the SEC. We undertake no obligation to
publicly update or revise forward-looking statements, including any of the
projections presented herein, to reflect events or circumstances after the date
made or to reflect the occurrence of unanticipated events.
TABLE
OF CONTENTS
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PAGE
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PART
I.
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Item
1.
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Business
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1
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Item
1A.
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Risk
Factors
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6
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Item
1B.
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Unresolved
Staff Comments
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11
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Item
2.
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Properties
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12
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Item
3.
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Legal
Proceedings
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13
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Item
4.
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Submission
of Matters to a Vote of Security Holders
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14
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PART
II.
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Item
5.
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Market
for Common Equity, Related Shareholder Matters and Issuer Purchases of
Equity Securities
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15
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Item
6.
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Selected
Financial Data
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17
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Item
7.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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20
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Item
8.
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Financial
Statements and Supplementary Data
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42
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Item
9.
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Changes
in and Disagreements with Accountants on Accounting and Financial
Disclosure
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42
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Item
9(T).
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Controls
and Procedures
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42
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Item
9B.
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Other
Information
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43
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PART
III.
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Item
10.
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Directors,
Executive Officers and Corporate Governance
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44
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Item
11.
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Executive
Compensation
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44
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Item
12.
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Security
Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
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44
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Item
13.
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Certain
Relationships, Related Transactions, and Director
Independence
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44
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Item
14.
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Principal
Accounting Fees and Services
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44
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PART
IV.
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Item
15.
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Exhibits,
Financial Statement Schedules
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45
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Signatures
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53
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We are a
leading provider of petroleum product distribution services, transportation
logistics and emergency response services to the
trucking, manufacturing,
construction, shipping, utility, energy, chemical, telecommunication and
government services industries.
We provide our services and
products through 31
service
locations in the eleven states of Alabama, California, Florida,
Georgia, Louisiana, Mississippi, Nevada, North Carolina, South Carolina,
Tennessee and Texas.
The
broad range of services we
offer our customers includes commercial mobile and bulk fueling; the packaging,
distribution and sale of lubricants; integrated out-sourced fuel management;
transportation logistics and emergency response services. Our fleet
of custom specialized
tank wagons, tractor-trailer
transports, box trucks, and customized flatbed vehicles delivers
diesel
fuel and gasoline to customers’ locations on a regularly scheduled or as needed
basis, refueling vehicles and equipment, re-supplying fixed-site
and temporary bulk storage
tanks, and emergency power generation systems
; and distributes a wide
variety of specialized petroleum products, lubricants and chemicals to our
customers. In addition, our fleet of
special duty
tractor-trailer units provides heavy haul transportation services over short and
long distances to customers requiring the movement of over-sized or
over-weight
equipment
and manufactured products.
We were originally
incorporated in Florida in 1996, under the name Streicher Mobile Fueling, Inc.
(“Streicher”). SMF Energy Corporation (the “Company”), a Delaware
corporation, was formed in 2006 as a wholly-owned subsidiary of
Streicher. In December 2006, the shareholders of Streicher approved
changing the name of Streicher to SMF Energy Corporation and the reincorporation
of Streicher in Delaware by merger into the Company. These actions
were effectuated on February 14, 2007 by the merger of Streicher into the
Company. Unless indicated otherwise,
“
the Company”,
“
SMF”,
“
we”,
“
us”, and
“
our” refer to SMF Energy
Corporation and its subsidiaries.
Strategy
An
objective of our business model is to become the leading “single source”
provider of petroleum products and services to our target customers in the
eleven states in which we presently have operating locations, as well as
expanding into additional markets in the Southeast, Mid-Atlantic, Mid-Continent
and West Coast regions of the U.S. We seek to offer our customers a
diversified package of quality and reliable petroleum products and service with
24 hour around the clock availability at competitive prices. To
achieve this objective we plan to grow organically and through selective
acquisitions.
Our
organic growth strategy is focused on increasing market share in our existing
operating locations and contiguous geographic areas. We seek market
share expansion through a concentrated market penetration and sales program
offering a broader line of products and services to both existing and
prospective customers. We believe that our corporate infrastructure,
including our Enterprise Resource Planning (“ERP”) operating system, has enabled
us to operate more efficiently and to reduce operating costs and administrative
expenses. This system has facilitated the consolidation of financial
management reporting and analysis functions, improved management controls, and
helped us comply with some of the requirements of the Sarbanes-Oxley Act of
2002.
Our
acquisition strategy is focused on acquiring companies, assets and business
operations that complement or offer diversified opportunities for growth in the
markets where we already have an established presence or that permit us to
expand into new markets. We believe that carefully selected future
acquisitions can provide us with increased market share, volume and
margins. In addition, such acquisitions would enhance our operational
and administrative efficiencies by helping us achieve greater economies of
scale. Our corporate infrastructure and our ERP system are the
foundations on which we can build our business and expand; we are now able to
more effectively pursue acquisitions.
We
evaluate potential acquisitions based on a variety of factors,
including:
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growth
potential of product and service
lines;
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impact
on our competition;
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customer
loyalty and retention;
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commitment
of management and other personnel;
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integration
efficiencies and controls; and
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transaction
financing alternatives, among
others.
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We expect
to fund future acquisitions primarily by raising additional
capital. This capital may be in the form of equity, debt or a
combination of both. While we expect to be able to satisfy these
capital requirements, there is no assurance that we will be able to do so, and
any failure to raise needed capital will impede the implementation of our growth
strategy.
Products,
Services and Operations
Commercial
Mobile
and Bulk
Fueling
and Fuel
Management Services
We provide commercial
mobile and bulk fueling deliveries on a regularly scheduled or as needed
basis, refueling vehicles and equipment, and re-supplying
bulk storage tanks and
emergency power generation systems.
Traditionally,
businesses and other entities that operate fleets of vehicles and equipment have
met their fueling requirements by fueling vehicles at retail stations or at
other third party facilities or by maintaining their own supply of fuel in
on-site storage tanks. We believe that the commercial mobile fueling
and out-sourced fuel management services we offer provide numerous benefits to
our customers, including lower labor and administrative costs associated with
fueling vehicles, centralized control and management over fuel inventories, data
useful for management and tax reporting, elimination of environmental risks and
related costs associated with on-site fuel storage and dispensing facilities,
and elimination of security risks associated with off-site fueling by
employees.
Our commercial mobile fueling
solutions include the use of our patented proprietary electronic fuel tracking
control system
to measure, record and track fuel dispensed to each
vehicle and tank fueled at a customer location. This system allows
verification of the amount and type of fuel delivered and provides customers
with customized fleet fuel data. Depending on the customer
application, the benefits of our commercial mobile fueling and out-sourced fuel
management services over traditional fueling methods may include:
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Reduced Operating Costs and
Increased Labor Productivity
. Fleet operators are able
to reduce operating costs and lower payroll hours by eliminating the need
for their employees to fuel vehicles either on-site or at local retail
stations and other third party facilities. Overnight fueling
prepares fleet vehicles for operation at the beginning of each workday and
increases labor productivity by allowing employees to use their vehicles
during time that would otherwise be spent fueling. Vehicle use
is maximized since fueling is conducted during non-operating
hours. The fuel necessary to operate vehicles is reduced since
fueling takes place at customer locations. The administrative
burden required to manage fuel programs and monitor vehicle utilization is
also reduced.
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Centralized Inventory Control
and Management
. Our fuel management system provides
fleet operators with a central management data
source. Web-based comprehensive reports detail, among other
things, the location, description, fuel type and daily and weekly fuel
consumption of each vehicle or piece of equipment that we
fuel. This eliminates customers’ need to invest working capital
to carry fuel supplies and allows customers to centralize fuel inventory
controls as well as track and analyze vehicle movements and fuel
consumption for management and fuel tax reporting purposes. We
are also able to service and manage fuel delivery to a customer’s on-site
storage tank, and using our technology we can provide reports detailing
fuel dispensed from the tank into each of the customer’s
vehicles. Our system is specifically designed for use in
commercial fueling and is certified for accuracy by The National
Conference on Weights and
Measures.
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Tax Reporting
Benefits
. Our fuel management system can track fuel
consumption to specific vehicles and fuel tanks, providing tax reporting
benefits to customers consuming fuel in uses that are tax-exempt, such as
for off-road vehicles, government-owned vehicles and fuel used to operate
refrigerator units on vehicles. For these uses, the customers
receive reports that provide them with the information required to
substantiate tax exemptions.
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Elimination of Expenses and
Liabilities of On-site Storage
. Fleet operators who
previously satisfied their fuel requirements using on-site storage tanks
can eliminate the capital and costs relating to installing, equipping and
maintaining fuel storage and dispensing facilities, including the cost and
price volatility associated with fuel inventories; complying with
escalating environmental government regulations; and carrying increasingly
expensive insurance. By removing on-site storage tanks and
relying on commercial mobile fueling, customers are able to avoid
potential liabilities related to both employees and equipment in
connection with fuel storage and handling. Customers’ expensive
and inefficient use of business space and the diminution of property
values associated with environmental concerns are also
eliminated.
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Lower Risk of Fuel
Theft
. Fleet operators relying on employees to fuel
vehicles, whether at on-site facilities or at retail stations, often
experience shrinkage of fuel inventories or excess fuel purchases due to
employee fraud. Our fuel management system prevents the risk of
employee theft by dispensing fuel only to authorized
vehicles. Utilizing our fueling services, rather than allowing
employees to purchase fuel at local retail stations, also eliminates
employee fraud due to credit card
abuse.
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·
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Access to Emergency Fuel
Supplies and Security
. Emergency preparedness, including
fuel availability, is critical to the operation of governmental agencies,
utilities, communication companies, delivery services and numerous other
fleet operators. We provide access to emergency fuel supplies
at times and locations chosen by our customers, allowing them to react
more quickly and effectively to emergency situations, such as severe
weather conditions and related disasters. Fueling by fleet
operators at their own on-site storage facilities, and/or at retail and
other third party locations may be limited due to power interruptions,
supply outages or access and other natural limitations. In
addition, since security concerns of fleet operators to terrorism,
hijacking and sabotage are increasing, fueling vehicles at customers’
facilities eliminates security risks to the fleet operators’ employees and
equipment rather than fueling at retail service stations and other third
party facilities.
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Packaging,
Distribution and Sale of Lubricants, Other Petroleum Products and
Chemicals
We
distribute and sell a wide array of petroleum-based lubricants, including
products such as gear oil, engine oil, heavy-duty motor oil, hydraulic oil,
transmission oil, specialty high temperature grease and synthetic lubricants,
from our Texas facilities. Our operations include the repackaging of
lubricants purchased in bulk quantities and the blending of lubricant products
to meet specific customer requirements. We also distribute dry
cleaning solvents and other chemicals.
Transportation Logistics
Services
Some of
our customers, particularly those engaged in the construction industry within
Texas, require the movement of heavy equipment, such as bulldozers, cranes and
road grading equipment. To meet this demand, we provide specialized
transportation and logistics services utilizing a fleet of re-configurable
tractor-trailer units to provide the delivery of specialized commodities,
including heavy haul, over-size and/or over-weight machinery and
equipment. These services are primarily supplied in Texas as well as
in the Southeast and Southwest regions of the U.S.
Emergency Response
Services
We
provide fuel supply services to governmental agencies, utilities, communication
companies, delivery services and other fleet and equipment operators when
emergency situations, such as severe weather conditions and related disasters,
create power interruptions, supply outages or access restrictions on our
customers. We provide access to emergency fuel supplies at times and
locations chosen by our customers, allowing them to react more quickly and
effectively to emergency situations. In addition, our emergency
generator services program provides customers with ongoing fuel testing,
treatment, filtration and top-off services to ensure that generators and other
emergency power supply systems are fully fueled and that the fuel is in optimal
condition for use at the onset of power outages. We then provide
emergency fuel supplies in a series of scheduled deliveries for the duration of
power outages based on the consumption and utilization requirements of these
generator systems.
Operating
Equipment
We operate a fleet of over
200
specialized
commercial vehicles, including fueling and lubricant tank wagons, tractor
trailer fuel and lubricant transports, lubricant delivery box trucks, flatbed
vehicles and
special heavy haul tractor-trailer units. Our
custom commercial mobile fueling trucks have fuel carrying capacities ranging
from 2,800 to 4,500 gallons and are equipped with multi-compartmented
tanks. The fuel we deliver is acquired daily at local third-party
petroleum terminal storage facilities. Each truck typically services
between five and fifteen customer locations per night or day, on specified
delivery routes. The driver of each truck also fuels the customer
vehicles.
We also own over 800 fuel and
lubricant storage tanks with total capacity in excess of
1.7
million
gallons. These tanks include bulk storage tanks located at our
facilities and portable tanks used for the temporary storage and dispensing of
fuels and lubricants at customer job sites.
We also deliver
portable storage tanks to the customer’s job-site or other locations; and
reposition, re-supply and maintain them as required, on a scheduled or on an as
needed basis.
Marketing
and Customers
We
identify and market to potential customers requiring petroleum related services
and products within our established service areas. We also pursue the
development of new markets by first evaluating the profitability of volume and
margin commitments of any potential customers in those new areas. Our
primary methods for developing new business are through direct marketing and
referrals from existing customers as well as from our own
personnel. We evaluate new customers on factors such as type and size
of service required, proximity to existing markets, volume commitments,
profitability margins and credit worthiness.
Our
commercial mobile and bulk fueling and lubricant distribution customers are
principally companies operating fleets of vehicles and equipment in a variety of
industries including the
trucking, manufacturing,
construction, shipping, utility, energy, chemical, telecommunication and
government services industries
. We are usually the exclusive
service provider for the fueling of a customer’s entire fleet or a particular
location of vehicles and equipment. Our lubricant customers are
primarily companies requiring large volumes of specialty industrial oils, motor
and gear lubricants and greases that must adhere to rigid technical and
performance specifications. In addition, we market and distribute
solvents and specialty petroleum products to dry cleaners and industrial
customers in Texas and certain other products, such as fire training chemicals,
throughout the U.S.
During
the years ended June 30, 2009, 2008 and 2007, approximately 10%, 7.3% and
6.7%, respectively, of our total revenues, were derived from fleet fueling
services provided to the United States Postal Service, our largest
customer. We (including predecessor companies affiliated with our
founders) have provided fueling services to the United States Postal service for
over 15 years. Although we do have some length of service written
contracts with a few of our larger customers, these types of agreements are not
customary in the fuel and lubricant distribution industry, and therefore, we do
not have written contracts with the majority of our customers. Most
of our customers can terminate our services at any time and for any reason and,
correspondingly, we can discontinue service to those customers at any
time. We may also discontinue service to a customer if changes in
service conditions or other factors cause us not to reach our minimum targeted
levels of volumes and margins, and we are unable to negotiate a satisfactory
arrangement with the customer to reach our minimum financial
requirements.
The
Company bills for its petroleum and other products and services upon
delivery. All sales are final upon delivery. We generally
collect from our customers within 30 to 45 days of billing.
Fuel
and Lubricant Supply
We
purchase the fuel delivered to our customers from multiple suppliers at daily
market prices and in certain cases we qualify for discounts. We
monitor fuel prices and trends in each of our service markets daily seeking to
purchase our supply at the lowest prices and under the most favorable
terms. We mitigate commodity price risk by purchasing and delivering
fuel supplies daily and by generally utilizing cost-plus pricing when billing
customers.
We
purchase the majority of our lubricants primarily pursuant to a long-term supply
agreement with Chevron who also offers marketing and financing assistance to our
customers. Lubricants are distributed and sold in bulk, prepackaged
or repackaged by us to meet customer needs. We price lubricant
products on a cost plus basis. Traditionally, lubricants inventory
was not subject to as significant of a market price volatility as fuel products,
however, due to volatile petroleum prices, the prices of lubricants have been
impacted.
We
purchase chemicals from several key suppliers. Products are delivered
to our location to be redistributed to our customers via company owned
equipment. Chemical sales are done in truckload quantities, or in
containers ranging from 5 gallons to 55 gallons.
Competition
We
compete with other distributors of fuels, lubricants, chemicals and other
petroleum products, including several large regional distributors and numerous
small independent operators. Our mobile fueling operations also
compete with retail marketing outlets such as retail stations and other
third-party service locations. We believe that the primary
competitive factors affecting our market include price, ability to meet complex
and technical services needs, dependability, extended credit terms, service
locations, and the ability to provide fuel-management tools.
We
believe that our principal competitive advantages include:
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our
patented
proprietary electronic fuel tracking control
system
;
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our
reputation for timely, efficient and reliable delivery of products and
services;
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our
well trained drivers and support
staff;
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our
technical knowledge of our products and our customers’ needs;
and
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our
competitive pricing for products and services as a result of strong
business relationships with our principal
suppliers.
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Intellectual
Property
Our
patented
proprietary fuel tracking and management reporting system is widely used in our
commercial mobile fueling operations. We own all patents covering the
system, the rights to which are registered with the United States Patent and
Trademark Office and expire in the year 2015, unless otherwise extended. We also
rely upon a combination of trademark laws and non-disclosure and other
contractual arrangements to protect our proprietary rights.
Employees
At June
30, 2009, 2008 and 2007, we employed 248, 280 and 284 employees, of which
240,
267
and 269 were full-time employees, respectively.
Governmental
Regulation
Our
operations are affected by numerous federal, state and local laws, regulations
and ordinances, including those relating to protection of the environment and
worker safety. Various federal, state and local agencies have broad
powers under these laws, regulations and ordinances. In particular,
the operation of our commercial fleet of vehicles is subject to extensive
regulation by the U.S. Department of Transportation (“DOT”) under the
Federal Motor Carrier Safety Act (“FMCSA”), and our transportation of diesel
fuel and gasoline is further subject to the Hazardous Materials Transportation
Act (“HMTA”). We are subject to regulatory and legislative changes
that can affect the economics of the industry by requiring changes in operating
practices or influencing the demand for, and the cost of providing, mobile
fueling services. In addition, we depend on the supply of diesel fuel
and gasoline from the oil and gas industry and are thereby affected by changing
taxes, price controls and other laws and regulations generally relating to the
oil and gas industry. Our future operations and earnings may be
affected by new legislation, new regulations or changes in existing
regulations.
The
technical requirements of laws and regulations are becoming increasingly
expensive, complex and stringent. These laws may impose penalties or
sanctions for damages to natural resources or threats to public health and
safety. Changing laws and regulations may also expose us to liability
for the conduct of, or conditions caused by, others, or even for our own actions
that were in compliance with applicable laws when taken. Sanctions
for noncompliance may include revocation of permits, corrective action orders,
administrative or civil penalties and criminal prosecution. Certain
environmental laws provide for joint and several liabilities for remediation of
spills and releases of hazardous substances. In addition, we may be
subject to claims alleging personal injury or property damage as a result of
alleged exposure to hazardous substances, as well as damage to natural
resources.
There is
no assurance that we will be able to comply with existing and future regulatory
requirements without incurring substantial costs or otherwise adversely
affecting our operations.
Available
Information
More
information about the Company can be found at our website,
www.mobilefueling.com
. This
annual report on Form 10-K as well as our quarterly reports on Form 10-Q,
current reports on Form 8-K, proxy statements and other information are
filed with the Securities Exchange Commission (“SEC”). We post these
reports on the “Investor Relations” section of our website promptly after we
file them with the SEC. Our Code of Business Conduct is also posted
on our website. All of these documents are available in print without
charge to our shareholders upon request. Information on our website
is not incorporated by reference in, and is not a part of, this report on Form
10-K.
All of
our filings with the SEC may be reviewed at the SEC’s website,
www.sec.gov
. They
may also be read and copied at the SEC’s Public Reference Room at 100 F Street,
N.E., Room 1580, Washington, DC 20549, on official business days during the
hours of 10 a.m. to 3 p.m. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330.
Item
1A. Risk Factors
We
are affected by a wide range of risk factors that could materially affect our
business, results of operations and financial condition, and could therefore
cause operating results to differ materially from those expressed in any
forward-looking statements made by or on behalf of us elsewhere in this report.
In addition, investors in our common stock and other securities also bear
certain risks relating to those securities and the trading market for our common
stock. Below are some of the material factors and risks that could
affect our results of operations or the value of our securities:
No Assurance of
Future Profitability; Losses from Operations; Need for Capital.
We
incurred net losses in each of the fiscal years ended June 30, 2009 and
2008. In order to generate profits in the future, we need to reduce
interest expense, increase the volume of products and services sold at
profitable margins, control costs and generate sufficient cash flow to support
our working capital and debt service requirements. There is no
assurance that we will be able to avoid net losses in the future or that we will
be able to raise additional capital on acceptable terms if our capital needs
cannot be satisfied by cash flow from operations. During fiscal 2009, we faced a
number of challenges that required us to raise additional capital in the face of
a general tightening of the credit markets and various Nasdaq listing
requirements. While we responded to those challenges by completing a
$40 million recapitalization in June 2009 (the “Recapitalization”) that had
an immediate reduction of our total debt by $4.5 million, reduced our annual
servicing expense for interest and dividends by over $1 million,
increased our shareholders’ equity by $4.1 million and reduced our
debt to equity ratio from approximately 9 to 1 to 2 to 1 from June 30, 2008
to June 30, 2009, respectively, we may nevertheless face difficulty in the
future obtaining necessary capital. In the future, we may need to
raise additional capital to fund new acquisitions, the expansion or
diversification of existing operations or additional debt
repayment. While we believe that, with the new financial strength
resulting from the Recapitalization, we will be able to obtain needed capital,
there can be no assurance that we will do so or that it can be obtained on terms
acceptable to us.
Nasdaq Listing of
Our Common Stock.
Our common stock currently trades on the
Nasdaq Capital Market under the symbol FUEL. While we consider the listing on
Nasdaq to be a valuable attribute of our common stock and other securities,
there can be no assurance that such listing will continue. During
Fiscal 2008, our listing on Nasdaq came into question on two different
grounds. On February 19, 2008, we received a letter from Nasdaq
stating that we did not comply with the requirement of Nasdaq Marketplace Rule
4310(c)(3) requiring listed companies to have $2,500,000 in stockholders'
equity. In response, on February 29, 2008, we issued 4,587 shares of
Series A Convertible Preferred Stock for approximately $2.52 million in cash and
debt and on March 12, 2008, we issued 1,985 shares of our Series B Convertible
Preferred Stock for approximately $1.8 million in debt. These
transactions increased our stockholders’ equity by approximately $4.1 million,
permitting us to regain compliance with Rule 4310(c)(3). During
fiscal 2009, the Company completed a recapitalization of our debt and equity
which increased stockholders’ equity to $6.5 million at June 30, 2009, and we
therefore continue to be in compliance with the Nasdaq stockholders’ equity
requirement. There is no assurance, however, that such compliance
will continue indefinitely since any future net operating losses would reduce
our stockholders’ equity and could cause us to again be in violation of Rule
4310(c)(3).
In
addition, on December 28, 2007, we received notice from Nasdaq that, because the
bid price of our common stock had closed below the minimum $1.00 per share
requirement of Marketplace Rule 4310(c) for 30 consecutive business days,
compliance with the $1.00 bid price requirement was required by June 25,
2008. When the bid price stayed below the minimum after that date, we
filed an appeal to a Nasdaq Listing Qualifications Panel to prevent a delisting
of our common stock. On September 11, 2008, the Panel granted the
extension of time until December 23, 2008. Under the terms of the
extension, the Company must have a closing bid price of $1.00 or more for a
minimum of ten prior consecutive trading days on or before December 23, 2008,
and had to otherwise maintain compliance with all other applicable Nasdaq
listing standards. Due to recent extraordinary market conditions, in
October 2008, the NASDAQ implemented a temporary suspension of the minimum $1.00
per share requirement of Marketplace Rule 4310(c) which suspension continued
through July 31, 2009. As a result, our deadline for reestablishing
compliance is now October 15, 2009. In order to do so, our
shareholders have approved and our Board of Directors has implemented a 1 for
4.5 reverse stock split that will take effect on October 1,
2009. While this reverse stock split is intended to
increase the trading price of the common stock above the $1.00 minimum bid
price, there can be no assurance that the market price per post-split share will
either exceed or remain in excess of the minimum for the sustained period of
time necessary to ensure long term compliance with Nasdaq rules.
Effects of Nasdaq
Delisting.
It is possible that, notwithstanding the
reverse stock split and our June 2009 Recapitalization, our common stock will
still be delisted from Nasdaq. If this occurs, we believe that it
would trade in the over-the-counter market on the OTC Bulletin Board (the
“OTCBB”), which was established for trading the securities of reporting
companies that do not meet the Nasdaq listing requirements. Because
the OTCBB is generally considered less efficient than Nasdaq, it could be more
difficult for an existing shareholder to sell shares of our common stock after a
delisting from Nasdaq. On the OTCBB, trading volumes are typically
lower, reporting of transactions can be delayed, and coverage of the Company by
securities analysts and news media, which is already limited, may be
reduced. In turn, these factors could result in lower prices for our
common stock or larger “spreads” between the “bid” and “ask” prices quoted by
market makers for shares of the Common Stock, either of which could reduce the
prices available for sales of our common stock by existing
shareholders.
Delisting
from Nasdaq could also impair the Company’s ability to raise additional capital
through equity or debt financing since Nasdaq listed securities are typically
viewed as more liquid than securities that are not traded on a national
securities exchange. In addition, if delisting does cause lower
prices for our common stock, it could then cause an increase in the ownership
dilution to shareholders when the Company issues equity securities in financing
or other transactions. The price at which we issue shares in such
transactions is generally based on or related to the market price of our common
stock, so a decline in the market price could result in the need for us to issue
a greater number of shares to raise a given amount of funding or to acquire a
given dollar value of goods or services.
In
addition, if our common stock is not listed on Nasdaq, we may become subject to
Rule 15g-9 under the Securities and Exchange Act of 1934, as amended (the
“Exchange Act”) because our common stock may be classified as a “penny stock”
under Exchange Act Rule 3a51-1. That rule imposes additional sales
practice requirements on broker-dealers who sell low-priced securities to
persons other than established customers and institutional accredited
investors. For transactions covered by this rule, a broker-dealer
must make a special suitability determination for the purchaser and have
received the purchaser’s written consent to the transaction prior to
sale. Consequently, the rule may affect the ability of broker-dealers
to sell our common stock and may impair the ability of our shareholders to sell
their common stock in the secondary market. Moreover, investors may
be less interested in purchasing low-priced securities because the brokerage
commissions, as a percentage of the total transaction value, tend to be higher
for such securities. Also, institutional investors will usually not
invest in low-priced securities (other than those which focus on
small-capitalization companies or low-priced securities). For these
reasons, a classification of our common stock as a “penny stock” under Rule
3a51-1 would probably adversely affect the liquidity and the value of our
stock.
Finally,
if our common stock was no longer listed on Nasdaq or any other national
securities exchange, we could no longer use the SEC’s short form registration
forms, such as Form S-3, to register shares of our common stock under the
Securities Act of 1933 but would have to instead use the longer registration
forms, such as Form S-1. While the negative impact of long form
registration has been reduced by recent SEC rule changes permitting most
purchasers of stock in unregistered offering to freely resell their securities
six months after the purchase under Rule 144, long form registration would
probably require more time, effort and expense, and may in turn limit the value
of our common stock
Price
Depreciation After Reverse Stock Split.
The long term efficacy
of a reverse stock split in maintaining compliance with Nasdaq’s minimum bid
price requirement is uncertain. While the short-term result of a
reverse stock split can be reasonably predicted, the long-term consequences are
more difficult to confirm. The price of our common stock is likely to
be affected by our performance and by general market and economic conditions
that cannot be predicted or evaluated by the Board of Directors at this
time. Accordingly, even if the reverse stock split is successful in
reestablishing compliance with Nasdaq’s minimum bid price requirement and we
meet the stockholders’ equity and other requirements needed to maintain our
Nasdaq listing, there is no assurance that the aggregate market value of our
common stock will be greater after a reverse stock split than it would have been
without ever effecting a reverse stock split.
Volatility
of Trading Market for Our Stock.
During the past few years,
our stock has sometimes traded in large daily volumes and other times at much
lower volumes, in many cases at wide price variances. This volatility, which
could make it difficult for shareholders to sell shares at a predictable price
or at specific times, is generally due to factors beyond our control. Quarterly
and annual operating results, changes in general conditions in the economy, the
financial markets or other developments affecting us could also cause the market
price of our common stock to fluctuate. The market price of our common stock may
be affected by various other factors unrelated to the number of shares
outstanding after the reverse stock split, including our future performance and
general market conditions.
Acquisition
Availability; Integrating Acquisitions.
Our future growth
strategy involves the acquisition of complementary businesses, such as wholesale
fuel or petroleum lubricants marketers and distributors, wholesale fuel and
other commercial mobile fueling companies, and transportation logistics services
businesses. It is not certain that we will be able to identify or make suitable
acquisitions on acceptable terms or that any future acquisitions will be
effectively and profitably integrated into our operations. Acquisitions involve
numerous risks that could adversely affect our operating results, including
timely and cost effective integration of the operations and personnel of the
acquired business, potential write downs of acquired assets, retention of key
personnel of the acquired business, potential disruption of existing business,
maintenance of uniform standards, controls, procedures and policies, additional
capital needs, the effect of changes in management on existing business
relationships, and profitability and cash flows generally.
Our
credit facility with our principal lender also requires the Company to obtain
the consent of the financial institution prior to incurring additional debt, or
entering into mergers, consolidations or sales of assets.
Growth
Dependent Upon Future Expansion; Risks Associated With Expansion into New
Markets.
While we intend to expand more quickly through acquisitions, our
growth will also depend upon the ability to achieve greater penetration in
existing markets and to successfully enter new markets in both additional major
and secondary metropolitan areas. Such organic expansion will largely be
dependent on our ability to demonstrate the benefits of our services and
products to potential new customers, successfully establish and operate new
locations, hire, train and retain qualified management, operating, marketing and
sales personnel, finance acquisitions, capital expenditures and working capital
requirements, secure reliable sources of product supply on a timely basis and on
commercially acceptable credit terms, and successfully manage growth by
effectively supervising operations, controlling costs and maintaining
appropriate quality controls. There can be no assurance that we will be able to
successfully expand our operations into new markets.
Interest
Expense.
A substantial portion of our net losses for the
fiscal years ended June 30, 2009 and 2008 are attributable to the substantial
interest burden borne by the Company, including $2.5 million of
interest expense in fiscal 2009 and $3.1 million in 2008. The
majority of this interest expense is attributable to interest on our
revolving bank debt and our August 2007 senior subordinated secured debt, which
was substantially reduced by our June 2009 Recapitalization. If and
to the extent that interest rates generally increase or we are otherwise
required to bear higher interest rates for our future borrowings, our interest
expense could increase, adversely affecting our results of operations and
financial condition. Similarly, if we make one or more acquisitions
or if we incur additional net losses in the future and are required to borrow
funds to fund those acquisitions or offset those losses, the interest on the
higher level of debt could have a detrimental effect on our results of
operations and financial condition. Additionally, we are exposed to
fluctuating interest rates associated with our line of credit.
Need to Maintain
Effective Internal Controls.
In fiscal 2006, our management
identified significant deficiencies related to policies and procedures to ensure
accurate and reliable interim and annual consolidated financial statements that,
considered together, constituted a material weakness in our internal
controls. Even though we have taken the necessary steps to correct the
identified material weakness and have not identified any material weakness for
fiscal 2009, it is possible that, considering our size, our limited capital
resources and our need to continue to expand our business by acquisitions and
diversification, we may identify another material weakness in our internal
controls in the future. Moreover, even if we do not identify any material
weakness or significant deficiencies, our internal controls may not prevent all
potential errors or fraud because any control system, no matter how well
designed, cannot provide absolute assurance that the objectives of the control
system will be achieved.
Dependence on Key
Personnel
.
Our future
success will be largely dependent on the continued services and efforts of
Richard E. Gathright, our Chief Executive Officer and President, and on those of
other key executive personnel. The loss of the services of Mr. Gathright or
other executive personnel could have a material adverse effect on our business
and prospects. Our success and plans for future growth will also depend on our
ability to attract and retain additional qualified management, operating,
marketing, sales and financial personnel. There can be no assurance that we will
be able to hire or retain such personnel on terms satisfactory to us. We have
entered into written employment agreements with Mr. Gathright and certain other
key executive personnel. While Mr. Gathright’s employment agreement provides for
automatic one-year extensions unless either party gives notice of intent not to
renew prior to such extension, there is no assurance that Mr. Gathright’s
services or those of our other executive personnel will continue to be available
to us.
Fuel Pricing and
Supply Availability; Effect on Profitability
.
Diesel fuel and gasoline
are commodities that are refined and distributed by numerous
sources. We purchase the fuel delivered to our customers from
multiple suppliers at daily market prices and in some cases qualify for certain
discounts. We monitor fuel prices and trends in each of our service
markets on a daily basis and seek to purchase our supply at the lowest prices
and under the most favorable terms. Commodity price risk is generally
mitigated since we purchase and deliver our fuel supply daily and generally
utilize cost-plus pricing when billing our customers. If we cannot continue to
utilize cost-plus pricing when billing our customers, margins would likely
decrease and losses could increase. We have not engaged in derivatives or
futures trading to hedge fuel price movements. In addition, diesel fuel and
gasoline may be subject to supply interruption due to a number of factors,
including natural disasters, refinery and/or pipeline outages and labor
disruptions. Limitations on the amount of credit available from
suppliers has become a more significant issue for us in light of the tightening
of credit available to businesses over the past year. As a result,
increasing the availability of short term credit for fuel purchases was one of
the principal motivations for the June 2009 Recapitalization, which had an
immediate reduction of our total debt by $4.5 million, reduced our annual
servicing expense for interest and dividends by over $1 million,
increased our shareholders’ equity by $4.1 million and reduced our debt to
equity ratio from approximately 9 to 1 to 2 to 1 from June 30, 2008 to June
30, 2009, respectively. Irrespective of the reason, any reduction of
the availability of fuel supplies could impact our ability to provide mobile
fueling, commercial bulk fueling, and emergency response services and would
therefore impact our profitability.
Risks Associated
with Customer Concentration; Absence of Written Agreements.
Although we
provide services to many customers, a significant portion of our revenue is
generated from a few of our larger customers. Sales to our largest
customer, represents 10% of our total revenue in fiscal year
2009. While we have formal, length of service written contracts with
some of these larger customers, such agreements are not customary and we do not
have them with the majority of our customers. As a result, most of our customers
can terminate our services at any time and for any reason, and we can similarly
discontinue service to those customers. We may also discontinue service to a
customer if changes in the service conditions or other factors cause us not to
meet our minimum level of margins and rates, and the pricing or delivery
arrangements cannot be re-negotiated. As a result of this customer concentration
and the absence of written agreements, our business, results of operations and
financial condition could be materially adversely affected if one or more of our
larger customers were lost or if we were to experience a high rate of service
terminations of our other customers.
Effect of Reduced
Fuel Usage.
The dramatic increases
in fuel prices in fiscal 2008 and through the beginning of fiscal 2009 have
caused businesses, including many of our customers, to take steps to reduce the
amount of fuel that they consume in their operations by driving fewer miles or,
in some cases, by using higher mileage or alternative fuel
vehicles. In turn, these reductions have reduced the volumes
delivered by us to those customers. Even though fuel prices have
decreased, we have not experienced a significant increase in volumes sold, we
believe due to the difficult current economic conditions. It is
possible that customers’ fuel usage will continue to decline, requiring us to
obtain additional customers to replace the lost volume. If we cannot
replace the lost volume with new customers, our revenues and results of
operation will be negatively affected.
Competition.
We compete with other service providers, including several large regional
providers and numerous small, local independent operators, who provide some or
all of the same services that we offer to our customers. In the mobile fueling
area, we also compete with retail fuel marketing, since fleet operators have the
option of fueling their own equipment at retail stations and at other
third-party service locations such as card lock facilities. Our ability to
compete is affected by numerous factors, including price, the complexity and
technical nature of the services required, delivery dependability, credit terms,
the costs incurred for non-mobile fueling alternatives, service locations as
well as the type of reporting and invoicing services provided. There can be no
assurance that we will be able to continue to compete successfully as a result
of these or other factors.
Operating Risks
May Not Be Covered by Insurance.
Our operations are subject to the
operating hazards and risks normally incidental to handling, storing and
transporting diesel fuel and gasoline, which are classified as hazardous
materials. We maintain insurance policies in amounts and with coverages and
deductibles that we believe are reasonable and prudent. There can be no
assurance, however, that our insurance will be adequate to protect us from
liabilities and expenses that may arise from claims for personal and property
damage arising in the ordinary course of business, including business
interruption; that we will be able to maintain acceptable levels of insurance;
or that insurance will be available at economical prices.
Governmental
Regulation.
Numerous federal, state and local laws, regulations and
ordinances, including those relating to protection of the environment and worker
safety, affect our operations. There can be no assurance that we will be able to
continue to comply with existing and future regulatory requirements without
incurring substantial costs or otherwise adversely affecting our
operations.
Changes in
Environmental Requirements.
We expect to generate
future business by converting certain fleet operators, currently utilizing
underground fuel storage tanks for their fueling needs, to commercial mobile
fueling. The owners of underground storage tanks have been required to remove or
retrofit those tanks to comply with technical regulatory requirements pertaining
to their construction and operation. If other more economical means of
compliance are developed or adopted by owners of underground storage tanks, the
opportunity to market our services to these owners may be adversely
affected.
Terrorism and
Warfare in the Middle East May Adversely Affect the Economy and the Price and
Availability of Petroleum Products.
Terrorist attacks, as well as the
continuing political unrest and warfare in the Middle East, may adversely impact
the price and availability of fuel, our results of operations, our ability to
raise capital and our future growth. The impact of terrorism on the oil industry
in general, and on us in particular, is not known at this time. An act of terror
could result in disruptions of crude oil or natural gas supplies and markets,
the sources of our products, and our infrastructure facilities or our suppliers
could be direct or indirect targets. Terrorist activity may also hinder our
ability to transport fuel if the means of supply transportation, such as rail or
pipelines, become damaged as a result of an attack. A lower level of economic
activity following a terrorist attack could result in a decline in energy
consumption, which could adversely affect our revenues or restrict our future
growth. Instability in the financial markets as a result of terrorism could also
impair our ability to raise capital. Terrorist activity or further instability
in the Middle East could also lead to increased volatility in fuel prices, which
could adversely affect our business generally.
Item
1B. Unresolved Staff Comments
Not
applicable.
Item
2. Properties
Our
corporate headquarters are located in 20,400 square feet of leased office space
in Fort Lauderdale, Florida. Our lease for this facility expires on
July 31, 2013.
In
addition, we own truck yard and office space in Tampa,
Florida. We also lease truck yard and office space for 18
locations specified below as of June 30, 2009, primarily under 1 to 5 year
leases which include lease renewal options. We believe that our
facilities are adequate for our current needs.
Location
|
|
Lease Expiration
|
|
|
|
Bloomington,
CA
|
|
7/15/2010
|
|
|
|
Gardena,
CA
|
|
7/15/2009
|
|
|
|
Jacksonville,
FL
|
|
8/31/2015
|
|
|
|
Orlando,
FL
|
|
11/30/2009
|
|
|
|
Port
Everglades, FL
|
|
5/31/2010
|
|
|
|
Doraville,
GA
|
|
8/31/2011
|
|
|
|
Gonzales,
LA
|
|
9/30/2009
|
|
|
|
Charlotte,
NC
|
|
11/30/2009
|
|
|
|
Greensboro,
NC
|
|
5/31/2010
|
|
|
|
Selma,
NC
|
|
11/1/2009
|
|
|
|
Channelview,
TX
|
|
8/31/2009
|
|
|
|
Freeport,
TX
|
|
9/30/2010
|
|
|
|
Ft.
Worth, TX
|
|
12/31/2009
|
|
|
|
Houston,
TX
|
|
9/30/2010
|
|
|
|
Lufkin,
TX
|
|
9/30/2010
|
|
|
|
Selma,
TX
|
|
12/31/2013
|
|
|
|
Elm
Mott, TX
|
|
12/31/2009
|
|
|
|
Waxahachie,
TX
|
|
9/30/2010
|
We also
lease the following facilities on a month to month basis:
Fort
Myers, FL
|
|
|
|
|
|
Melbourne,
FL
|
|
|
|
|
|
Ellabell,
GA
|
|
|
|
|
|
Byram,
MS
|
|
|
|
|
|
North
Las Vegas, NV
|
|
|
|
|
|
Chattanooga,
TN
|
|
|
|
|
|
Buda,
TX
|
|
|
|
|
|
Longview,
TX
|
|
|
Item
3. Legal Proceedings
The
Company and its subsidiaries are from time to time parties to legal proceedings,
lawsuits and other claims incident to their business activities. Such
matters may include, among other things, assertions of contract breach, claims
for indemnity arising in the course of the business and claims by persons whose
employment with us has been terminated. Such matters are subject to
many uncertainties, and outcomes are not predictable with
assurance. Consequently, management is unable to ascertain the
ultimate aggregate amount of monetary liability, amounts which may be covered by
insurance or recoverable from third parties, or the financial impact with
respect to these matters as of June 30, 2009. Therefore no
contingency gains or losses have been recorded as of June 30,
2009. However, based on management’s knowledge at the time of this
filing, management believes that the final resolution of such matters pending at
the time of this report, individually and in the aggregate, will not have a
material adverse effect upon the Company’s consolidated financial position,
results of operations or cash flows.
On
October 10, 2006, the Company commenced a civil action in Broward County,
Florida Circuit Court against Financial Accounting Solutions Group, Inc.
(“FAS”), Kramer Professional Staffing, Inc. (“KPS”), and Mitchell Kramer, an
officer, director, shareholder and control person of FAS and KPS (“Kramer”),
alleging that Kramer, FAS and KPS (collectively, the “Defendants”) induced the
Company to engage FAS to provide services with respect to (a) the implementation
of certain Information Technology (“IT”) functions; (b) the modernization and
expansion of the Company’s accounting and business technology capabilities, and
(c) compliance with public company accounting requirements and the
Sarbanes-Oxley Act (the “IT Projects”) by making numerous misrepresentations
concerning the experience, capabilities and background of FAS and FAS’
personnel. FAS subsequently filed a countersuit in the same court
seeking payment of additional fees allegedly due from the
Company. The court is jointly administering the countersuit with the
Company’s action. The Company amended its complaint to add Alex
Zaldivar, the managing director and a principal of FAS, as an additional
Defendant and to make new claims for accounting malpractice, negligent IT
implementation, negligent training and supervision, negligent placement and
breach of fiduciary duty against the Defendants. The case is
currently in the discovery stage, and is tentatively scheduled for a nonbinding
mediation session on October 12, 2009. The amount of damages
recoverable from the Defendants in this action will depend on a number of
factors, including but not limited to the costs incurred by the Company in
completing the IT Projects, the amount of consequential damages suffered by the
Company as a result of the delays and poor performance by FAS in implementing
the IT projects, potential counterclaims or countersuit by FAS for amounts
billed to the Company which the Company has refused to pay, and the assessment
by the Company, based on input from the new vendor engaged by the Company to
replace FAS, of the estimated costs to complete the IT Projects. The
Company believes that, based on all available information, the likelihood of FAS
prevailing in any litigation against the Company is remote and the chance of
recovery by FAS against the Company is slight.
By the
filing of a Demand for Arbitration with the American Arbitration Association in
Broward County, Florida on May 26, 2009, the Company brought claims against
various members of the Harkrider family arising out of the October 1, 2005,
purchase of H & W Petroleum Company, Inc. (“H & W”) from the Harkrider
family and H & W’s purchase of certain assets of Harkrider Distributing
Company, Inc. (“HDC”) immediately prior to the Company’s purchase of H &
W. In that action, Case No. 32 198 Y 00415 09 (the “Arbitration”),
the Company and H & W, which is now the Company’s wholly owned subsidiary,
sought damages for breaches of, and indemnification under, the October 1, 2005,
Stock Purchase Agreement between various Harkrider family members and the
Company and under the September 29, 2005, Asset Purchase Agreement between HDC
and various members of the Harkrider family, on the one hand, and H & W on
the other, along with various other claims arising from the
transaction. Also on May 26, 2009, H & W filed a second action
against various members of the Harkrider family in the District Court in Harris
County, Texas, Civil Action No. 2009-32909 (the “Harris County Action”), seeking
damages and declaratory relief for various breaches of H & W's lease of its
Houston, Texas, facility by H & W’s landlord, the Harkrider Family
Partnership, and other related claims. On June 24, 2009, the parties
to the Arbitration and the Harris County Action agreed that all of the claims
brought in the Arbitration would be dismissed and all of those claims would be
added to the Harris County Action. On June 29, 2009, in accordance
with the stipulation of the parties to consolidate the Arbitration with the
Harris County Action, the American Arbitration Association closed the
Arbitration. The Harris County Action is currently in the discovery
phase.
Item
4. Submission of Matters to a Vote of Security Holders
No
matters were submitted to a vote of the security holders, through the
solicitation of proxies or otherwise, during the fourth quarter of fiscal year
2009.
PART
II
Item
5. Market for Common Equity, Related Shareholder Matters and Issuer
Purchases of Equity Securities
SMF
Energy Corporation’s common stock, par value $.01 (“common stock”) has traded in
the National Association of Securities Dealers Automated Quotation System
(“NASDAQ”) Market under the symbol “FUEL”, since December 11, 1996, the
date of the Company’s initial public offering. The following table
sets forth, for the periods indicated, the high and low prices for the common
stock, as reported by NASDAQ.
|
|
Common Stock
|
|
|
|
High
|
|
|
Low
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2009
|
|
|
|
|
|
|
1st
quarter
|
|
$
|
0.71
|
|
|
$
|
0.25
|
|
2nd
quarter
|
|
$
|
0.42
|
|
|
$
|
0.21
|
|
3rd
quarter
|
|
$
|
0.29
|
|
|
$
|
0.10
|
|
4th
quarter
|
|
$
|
0.70
|
|
|
$
|
0.14
|
|
|
|
|
|
|
|
|
|
|
Year Ended June 30, 2008
|
|
|
|
|
|
|
|
|
1st
quarter
|
|
$
|
1.62
|
|
|
$
|
1.20
|
|
2nd
quarter
|
|
$
|
1.36
|
|
|
$
|
0.62
|
|
3rd
quarter
|
|
$
|
1.03
|
|
|
$
|
0.40
|
|
4th
quarter
|
|
$
|
1.03
|
|
|
$
|
0.53
|
|
On June
30, 2009, the closing price of the common stock was $0.37 per
share. As of September 10, 2009, there were 71 holders of record of
our common stock and over 1,000 beneficial owners of our common
stock.
Dividends
We have
never declared or paid any dividends on our common stock. The payment
of dividends of our common stock, if any, is within the discretion of the Board
of Directors and will depend upon our earnings, our capital requirements and
financial condition and other relevant factors. The Board of
Directors does not intend to declare dividends in the foreseeable future and
intends to retain any future earnings for use in our business
operations.
While the
Company no longer has any shares of its Series A, Series B, or Series C
Preferred Stock issued or outstanding as a result of the June 2009
Recapitalization, in accordance with the respective Certificates of Designation
for each Series, dividends were payable thereon when, as and if declared by the
Board of Directors, but only out of funds that are legally available, in
quarterly cash dividends. Also per the Certificates of Designation,
the initial dividend rate of eighteen percent (18%) per annum of the sum of the
Original Issue Price per share was reduced to twelve percent (12%) in December
2008 because the Company achieved positive Earnings Before Interest, Taxes,
Depreciation and Amortization for two consecutive fiscal quarters.
Dividends
on the 3,228 outstanding shares of Series D Preferred Stock, which shares were
issued in the June 2009 Recapitalization, are payable when, as and if declared
by the Board of Directors, but only out of funds that are legally available, in
annual cash or equity dividends, at the Company’s election, at the rate of 5.5%
per annum of the sum of the Original Issue Price per share. Per the
Certificate of Designation for the Series D, the first dividend declaration for
the outstanding Series D Preferred Stock is expected to be approximately in
August 2010 and may, at the Company’s election, be paid in shares of the
Company’s common stock. Subsequent dividends on the Series D are
payable in cash except that, under specified circumstances, dividends may be
paid in the form of shares of a new series of nonvoting Preferred Stock, the
terms, rights and privileges of which are, other than the voting rights,
substantially identical to those of the Series D.
Dividends
on any of the Company’s Series of Preferred Stock are cumulative from the date
of the original issuance of the Preferred Stock. Accumulated unpaid
dividends on Preferred Stock do not bear interest.
During
fiscal 2008, the Company declared cumulative dividends of $249,000 of which
$56,000 was paid during fiscal 2008 and the remainder was paid during fiscal
2009.
During
fiscal 2009, the Company declared $577,000 in cumulative dividends on the Series
A, Series B, and Series C Preferred Stock, which have been paid or satisfied as
of June 30, 2009. On May 5, 2009, the Company entered into an
agreement with the holders of the Series A, Series B, and Series C Preferred
Stock to satisfy the dividends due for the quarters ended December 31, 2008, and
March 31, 2009 through the issuance of unregistered shares of common stock of
the Company. For purposes of determining the number of shares to be
issued for the unpaid dividends, shares were valued at $0.23 per share, the
official closing price on the Nasdaq Stock Market on April 24, 2009, the trading
day immediately preceding the April 27, 2009 effective date of the conversion
agreements. As a result, the Company issued 1,111,091 shares of
common stock to the holders of Preferred Stock in lieu of paying the $256,000 in
cash dividends for the quarters ended December 31, 2008, and March 31,
2009.
On June
29, 2009, as part of the Recapitalization, the Company entered into another
agreement with the holders of the Series A, Series B, and Series C Preferred
Stock to satisfy the dividends due for the quarter ended June 30, 2009 through
the issuance of shares of common stock of the Company. For purposes
of determining the number of shares to be issued for the unpaid dividends,
shares were valued at the negotiated price of $0.38 per share (the official
closing price on the Nasdaq Stock Market on the trading day immediately
preceding the June 29, 2009 effective date of the conversion agreements was
$0.37). As a result, the Company issued 330,519 shares of common
stock to the holders of Preferred Stock in lieu of paying the $126,000 in cash
dividends for the quarter ended June 30, 2009.
In the
June 2009 Recapitalization, the Company redeemed all the outstanding Series A,
Series B, and Series C preferred shares through the issuance of an aggregate of
11,047,504 common shares at the negotiated price of $0.38 per share, which was a
per share amount lower than the original terms of the securities. As
per EITF No. D-42, “The Effect on the Calculation of Earnings per Share for the
Redemption or Induced Conversion of Preferred Stock,” the Company reported the
additional securities issued to the preferred shareholders as a non-cash deemed
dividend of $1,746,216, which was a calculation of the difference between the
6,328,000 common shares that would have been issuable under the original
conversion rights that existed in the convertible preferred shares and the
11,047,504 common shares issued at $0.38 cents upon the redemption exchange
times the market price on the conversion date.
Convertible Promissory
Notes
Also in
the Recapitalization, the Company extinguished a portion of the August 2007 and
the September 2008 Notes (“the Notes”) through the issuance of 5,330,658 shares
and 1,249,999 shares of Common Stock, respectively, at the negotiated price of
$0.38 per share, which was higher than the $0.37 per share closing bid price on
the trading day immediately preceding the June 29, 2009
Recapitalization. The original terms of the Notes allowed for a
conversion of 50% of the August 2007 Notes and 100% of the September 2008 Notes
into common stock. The negotiated issuance price of $0.38 per share
in the Recapitalization was based on then current market prices, and it was
lower than the original conversion prices of $1.46 per share and $0.65 per share
of the August 2007 Notes and the September 2008 Notes,
respectively. Since the extinguishment of the Notes through issuance
of Common Stock was done at close to current market prices of the Common Stock,
the Company issued an aggregate of 4,462,456 more shares than it would have
issued for the convertible equivalent under the original terms of the
Notes.
Statement
of Financial Accounting Standards No. 84, “Induced Conversion of Convertible
Debt (as amended)” (“FAS No. 84”), specifies the method of accounting
for conversions of convertible debt to equity securities when the debtor induces
conversion of the debt by offering additional securities or other consideration
to convertible debt holders. In accordance with FAS No. 84, an
expense is recognized if and to the extent that “additional consideration is
paid to debt holders for the purpose of inducing prompt conversion of the debt
to equity securities (sometimes referred to as a convertible debt
‘sweetener’).” While the Company’s purpose in effecting the June 2009
Recapitalization was to effect a complete restructuring of its debt and equity
structure via a series of transactions that would have the effect of reducing
its outstanding debt and future obligations and there was no intent to induce
any conversion of the outstanding debt to common stock, a portion of the
exchange of the outstanding carrying value of $9.6 million in
convertible debt for an equal aggregate value of cash, common stock and
preferred stock is required by FAS No. 84 to be accounted for as an induced
conversion of outstanding debt securities. While we believe that the
application of FAS No. 84 does not reflect the economic substance of the value
exchanged in this portion of the Recapitalization transaction, we have reported
the required non-cash charge of approximately $1.65 million for the difference
between the number of common shares issued compared to the number of common
shares that would have been issued under the original terms of the convertible
debt instrument, times the market price on the conversion date.
The
Company understands that the accounting interpretation of FAS No. 84 is that an
inducement occurs any time additional shares are issued in the extinguishment of
convertible debt regardless of the absence of an economic loss or economic
intent of the parties to the transaction. As a result, the
application of FAS No. 84 to the exchange of existing convertible debt
securities for common stock resulted in the recording of a non-cash “inducement”
accounting charge of $1.65 million, which was a calculation of the difference
between the 2,118,201 common shares that would have been issuable to the
applicable note holder under the original conversion rights that existed in the
convertible Notes and the 6,580,657 common shares exchanged at $0.38 cents upon
the extinguishment. The shares amounts include the impact of the July
6, 2009 transaction as describe in Note 15 – Subsequent Events. This
non-cash charge is deemed a financing expense to extinguish the Notes and it is
included in the Consolidated Statements of Operations with a corresponding
increase in Additional paid-in capital and therefore the net impact has no
effect to total Shareholder’s Equity.
Equity
Compensation Plan Information
The
Company’s equity compensation plan information required by this item is
incorporated by reference from our Definitive Proxy Statement in connection with
our 2009 Annual Meeting of Stockholders to be filed with the Commission pursuant
to Regulation 14A no later than 120 days after the end of the fiscal
year covered by this report.
Issuer
Purchases of Equity Securities
None.
Item
6. Selected Financial Data
The
following table summarizes our selected historical financial information for
each of the last five fiscal years. The information presented below
has been derived from our audited consolidated financial
statements. This table should be read in conjunction with such
Consolidated Financial Statements and related notes and with “Management’s
Discussion and Analysis of Financial Condition and Results of Operations”
included in Item 7 of this Form 10K.
(in thousands, except net margin per
gallon and per share data)
|
|
Year Ended June 30,
|
|
|
|
|
2009
4
|
|
|
2008
4
|
|
2007
|
|
2006
|
|
2005
|
|
Selected
Income Statement Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
revenue
|
|
$
|
199,249
|
|
$
|
260,689
|
|
$
|
229,769
|
|
$
|
248,699
|
|
$
|
133,563
|
|
Gross
profit
|
|
$
|
16,440
|
|
$
|
12,912
|
|
$
|
12,631
|
|
$
|
12,409
|
|
$
|
6,588
|
|
Selling,
general and administrative expense
|
|
$
|
14,755
|
|
$
|
14,881
|
|
$
|
15,836
|
|
$
|
13,262
|
|
$
|
6,145
|
|
Operating
(loss) income
|
|
$
|
1,685
|
|
$
|
(1,969
|
)
|
$
|
(3,205
|
)
|
$
|
(853
|
)
|
$
|
443
|
|
Interest
expense
|
|
$
|
2,483
|
|
$
|
3,060
|
|
$
|
3,384
|
|
$
|
4,025
|
|
$
|
1,903
|
|
Non-cash FAS 84 Inducement on extinguishment
8
|
|
$
|
1,651
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
(Gain) loss on extinguishment of promissory notes
6
|
|
$
|
(27
|
)
|
$
|
1,749
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
$
|
(6,769
|
)
|
$
|
(6,589
|
)
|
$
|
(4,878
|
)
|
$
|
(1,460
|
)
|
Less: Non-cash FAS 84 Inducement on
extinguishment
8
|
|
$
|
1,651
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
$
|
-
|
|
Adjusted
net loss before non-cash FAS 84 inducement
9
|
|
$
|
(688
|
)
|
$
|
(6,769
|
)
|
$
|
(6,589
|
)
|
$
|
(4,878
|
)
|
$
|
(1,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Share
Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
$
|
(6,769
|
)
|
$
|
(6,589
|
)
|
$
|
(4,878
|
)
|
$
|
(1,460
|
)
|
Less: Preferred
stock dividends
|
|
|
(577
|
)
|
|
(249
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
Less: Non-cash EITF No. D-42 deemed
dividends
7
|
|
|
(1,746
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Net
loss attributable to common shareholders
|
|
$
|
(4,662
|
)
|
$
|
(7,018
|
)
|
$
|
(6,589
|
)
|
$
|
(4,878
|
)
|
$
|
(1,460
|
)
|
Basic
and diluted net loss per share attributable to common
shareholders
|
|
$
|
(0.31
|
)
|
$
|
(0.49
|
)
|
$
|
(0.57
|
)
|
$
|
(0.50
|
)
|
$
|
(0.19
|
)
|
Adjusted
Basic and diluted net loss per share attributable to common shareholders
excluding Non-cash FAS 84 inducement and deemed dividends on
extinguishment of convertible notes and preferred shares
10
|
|
$
|
(0.08
|
)
|
$
|
(0.49
|
)
|
$
|
(0.57
|
)
|
$
|
(0.50
|
)
|
$
|
(0.19
|
)
|
Basic
and diluted weighted average common shares outstanding
|
|
|
15,097
|
|
|
14,467
|
|
|
11,509
|
|
|
9,819
|
|
|
7,857
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of June 30,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
Selected
Balance Sheet Data:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
123
|
|
$
|
48
|
|
$
|
987
|
|
$
|
4,103
|
|
$
|
4,108
|
|
Accounts
receivable, net
|
|
$
|
15,878
|
|
$
|
30,169
|
|
$
|
25,442
|
|
$
|
24,345
|
|
$
|
14,129
|
|
Restricted
cash
|
|
$
|
-
|
|
$
|
69
|
|
$
|
1,145
|
|
$
|
-
|
|
$
|
-
|
|
Line
of credit payable
|
|
$
|
7,845
|
|
$
|
19,789
|
|
$
|
17,297
|
|
$
|
15,612
|
|
$
|
4,801
|
|
Long-term
debt (including current portion)
|
|
$
|
5,800
|
|
$
|
8,794
|
|
$
|
10,276
|
|
$
|
13,136
|
|
$
|
11,141
|
|
Shareholders’
equity
|
|
$
|
6,529
|
|
$
|
3,052
|
|
$
|
4,114
|
|
$
|
5,540
|
|
$
|
6,838
|
|
Total
Assets
|
|
$
|
30,118
|
|
$
|
46,984
|
|
$
|
43,925
|
|
$
|
48,114
|
|
$
|
30,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financial
and Statistical Information:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
¹
|
|
$
|
4,530
|
|
$
|
1,240
|
|
$
|
252
|
|
$
|
1,781
|
|
$
|
2,278
|
|
Net Margin
2
|
|
$
|
17,517
|
|
$
|
14,354
|
|
$
|
14,333
|
|
$
|
14,076
|
|
$
|
8,055
|
|
Net Margin per gallon (in dollars)
3
|
|
$
|
0.258
|
|
$
|
0.194
|
|
$
|
0.169
|
|
$
|
0.149
|
|
$
|
0.121
|
|
Total
Gallons
|
|
|
67,902
|
|
|
73,871
|
|
|
84,899
|
|
|
94,261
|
|
|
66,427
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-GAAP
Measure Reconciliation, EBITDA
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
2005
|
|
Calculation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
$
|
(6,769
|
)
|
$
|
(6,589
|
)
|
$
|
(4,878
|
)
|
$
|
(1,460
|
)
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense
5
|
|
|
2,483
|
|
|
3,060
|
|
|
3,727
|
|
|
4,025
|
|
|
1,903
|
|
Income
tax expense
|
|
|
32
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Depreciation
and amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales and SG&A
|
|
|
2,438
|
|
|
2,696
|
|
|
2,623
|
|
|
2,123
|
|
|
1,835
|
|
Stock-based
compensation expense
|
|
|
292
|
|
|
504
|
|
|
491
|
|
|
511
|
|
|
-
|
|
Non-cash FAS 84 Inducement on extinguishment
8
|
|
|
1,651
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
-
|
|
(Gain) loss on extinguishment of promissory notes
6
|
|
|
(27
|
)
|
|
1,749
|
|
|
-
|
|
|
-
|
|
|
-
|
|
Subtotal
|
|
|
6,869
|
|
|
8,009
|
|
|
6,841
|
|
|
6,659
|
|
|
3,738
|
|
EBITDA
|
|
$
|
4,530
|
|
$
|
1,240
|
|
$
|
252
|
|
$
|
1,781
|
|
$
|
2,278
|
|
Non-GAAP Measure Reconciliation, Adjusted basic and diluted net loss per
share attributable to common shareholders excluding non-cash FAS 84 inducement
and non-cash deemed dividends on extinguishment of convertible notes and
preferred shares
|
|
Fiscal
Year Ended June 30,
|
|
|
|
2009
|
|
2008
|
|
2007
|
|
2006
|
|
|
2005
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
$
|
(6,769
|
)
|
$
|
(6,589
|
)
|
$
|
(4,878
|
)
|
|
$
|
(1,460
|
)
|
Preferred
stock dividends
|
|
|
(577
|
)
|
|
(249
|
)
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Non-cash
deemed dividends for preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A, B and C redemption to common stock
|
|
|
(1,746
|
)
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to common shareholders
|
|
$
|
(4,662
|
)
|
$
|
(7,018
|
)
|
$
|
(6,589
|
)
|
$
|
(4,878
|
)
|
|
$
|
(1,460
|
)
|
Less: Non-cash
deemed dividends for preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A, B and C redemption to common stock
|
|
|
1,746
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Less: Non-cash
FAS 84 Inducement on extinguishment
|
|
|
1,651
|
|
|
-
|
|
|
-
|
|
|
-
|
|
|
|
-
|
|
Adjusted
net loss attributable to common shareholders
|
|
$
|
(1,265
|
)
|
$
|
(7,018
|
)
|
$
|
(6,589
|
)
|
$
|
(4,878
|
)
|
|
$
|
(1,460
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
basic and diluted net loss per share attributable to common shareholders
excluding non-cash FAS 84 inducement and non-cash deemed
dividends on extinguishment of convertible notes and preferred
shares
|
|
$
|
(0.08
|
)
|
$
|
(0.49
|
)
|
$
|
(0.57
|
)
|
$
|
(0.50
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share attributable to common shareholders
|
|
$
|
(0.31
|
)
|
$
|
(0.49
|
)
|
$
|
(0.57
|
)
|
$
|
(0.50
|
)
|
|
$
|
(0.19
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common shares outstanding
|
|
|
15,097
|
|
|
14,467
|
|
|
11,509
|
|
|
9,819
|
|
|
|
7,857
|
|
¹
EBITDA
is defined as earnings before interest, taxes, depreciation and, amortization
expense, a non-GAAP financial measure within the meaning of Regulation G
promulgated by the Securities and Exchange Commission. To the extent
that gain or loss and the non-cash FAS 84 inducement on extinguishment
of convertible notes constitutes the recognition of previously
deferred interest or finance cost, it is considered interest expense for the
calculation of certain interest expense amounts. We believe that EBITDA
provides useful information to investors because it excludes transactions not
related to the core cash operating business activities. We believe that
excluding these transactions allows investors to meaningfully trend and analyze
the performance of our core cash operations.
2
Net
margin = Gross profit plus cost of sales depreciation.
3
Net
margin per gallon = Net margin divided by total gallons sold.
4
Net
loss and EBITDA for the years ended June 30, 2009 and 2008, included a $27,000
gain on extinguishment of convertible notes and $1.7 million loss on
extinguishment of convertible notes, respectively.
5
The
year ended June 30, 2006 included $472,000 in interest expense to write-off debt
discounts and deferred debt costs and a prepayment penalty related to the
warrants issued on June 30, 2006, to convert a portion of the August 2003,
January 2005, and September 2005 Notes.
6
The
year ended June 30, 2009 included a $27,000 gain on extinguishment of
convertible notes which consisted of gains of extinguishment of $145,000, and
$23,000 to record at fair value of the common stock and the Series D Preferred
Stock issued to extinguish a portion of the August 2007 notes and the September
2008 notes, respectively, offset by the write offs of the unamortized debt costs
of $118,000 and unamortized debt discounts of $23,000 related to the exchanged
notes. The year ended June 30, 2008 included $1.7 million as loss on
extinguishment of promissory notes to write-off debt discounts and deferred debt
costs, a prepayment penalty and a gain on extinguishment related to the August
2007 refinancing of debt and the exchange of the November 2007 note and a
portion of the August 2007 note into Series A and Series B Preferred Stock. To
the extent that gain or loss and the non-cash FAS 84 inducement on
extinguishment of convertible notes constitutes the recognition of
previously deferred interest or finance cost, it is considered interest expense
for the calculation of EBITDA and certain interest expense amounts.
7
As
a result of the June 2009 Recapitalization, the Company redeemed all the
outstanding preferred shares through the issuance of an aggregate of 11,047,504
common shares at the negotiated price of $0.38 per share, which was an amount
lower than the original conversion terms of the convertible debt
securities. As per EITF No. D-42, “The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,”
the Company reported the additional securities issued to the preferred
shareholders as an inducement which resulted in a non-cash deemed dividend of
$1,746,216. See Note 4, Recapitalization.
8
Additionally,
as a result of the Recapitalization, the Company extinguished a portion
of the August 2007 and the September 2008 Notes (“the Notes”) through
the issuance of 5,330,658 shares and 1,249,999 shares, respectively, at the
negotiated price of $0.38 per share, which was greater than the $0.37 per share
closing bid price the day prior to the Recapitalization, but lower
than the conversion price applicable to the convertible debt
instruments, which resulted in the issuance of more shares in the exchange than
would have been issued upon a conversion. The practice of accounting
in the interpretation of FAS No. 84 is that an inducement occurs any time when
additional shares are issued in the extinguishment of convertible debt
regardless of the absence of an economic loss or economic intent of the parties
to the transaction. Irrespective of the economic reality of the
transaction, FAS No. 84 requires the recording of a non-cash “conversion
inducement” charge of $1,651,109, based on the difference between the aggregate
2,118,201 common shares issuable to the applicable note holder under the
original conversion rights that existed upon a conversion and the 6,580,657
common shares exchanged at $0.38 cents in the transaction that extinguished all
of the Notes. This non-cash charge is deemed a financing
expense to extinguish the Notes and it is included in the Consolidated
Statements of Operations with a corresponding increase in Additional paid-in
capital and therefore the net impact has no effect to total Shareholder’s
Equity. See Note 4 – Recapitalization. To the extent that the non
cash FAS 84 inducement on extinguishment of promissory notes constitutes
the recognition of a finance cost, it is considered interest expense for
the calculation of certain interest expense amounts.
9
Adjusted net loss before non-cash FAS 84 inducement is a
non-GAAP measure that excludes the non-cash FAS 84 inducement on extinguishment
of convertible notes. We believe that this is a meaningful Non-GAAP
representation of the ongoing performance of the operations excluding the effect
of a charge that was strictly related to the Recapitalization.
10
Adjusted Basic diluted net loss per share attributable to
common shareholders excluding non-cash FAS 84 inducement and deemed dividends on
exinguishment of convertible notes and preferred shares is a non-GAAP
measure that excludes the effect of a charge and dividends that were strictly
related to the Recapitalization. We believe that excluding them in this
non-GAAP calculation provides a meaningful representation of the ongoing
performance of the operations.
Item
7. Management’s Discussion and Analysis of Financial Condition and
Results of Operations
The
following discussion of our financial condition, results of operations,
liquidity and capital resources should be read in conjunction with our audited
consolidated financial statements and related notes included in Part III of this
Form 10-K, commencing on page F-1.
OUR
BUSINESS
We are a
supplier of specialized transportation and distribution services for petroleum
products and chemicals. We provide commercial mobile and bulk
fueling, lubricant and chemical distribution, emergency response services and
transportation logistics to the
trucking, manufacturing,
construction, shipping, utility, energy, chemical, telecommunications and
government services industries.
At June 30, 2009, the Company
was conducting operations through 31 service locations in the eleven states of
Alabama, California, Florida, Georgia, Louisiana, Mississippi, Nevada, North
Carolina, South Carolina, Tennessee and Texas.
We
provide commercial mobile and bulk fueling, integrated out-sourced fuel
management, packaging, distribution and sale of lubricants and chemicals,
transportation logistics, and emergency response services. Our
specialized equipment fleet delivers diesel fuel and gasoline to customer
locations on a regularly scheduled or as needed basis, refueling vehicles and
equipment, re-supplying bulk storage tanks, and providing fuel for emergency
power generation systems. Our fleet also handles the movement of
customer equipment and storage tanks we provide for use by our
customers. We also distribute a wide variety of specialized petroleum
products, lubricants and chemicals to our customers in Texas and in certain
other markets.
We
compete with several large and numerous small distributors, jobbers and other
companies offering services and products in the same markets in which we
operate. We believe that the industry and these markets offer us
opportunities for consolidation, as customers increasingly demand one-stop
shopping for their petroleum based needs and seek reliable supply deliveries
particularly to prevent business interruptions during emergencies. We
believe that certain factors, such as our ability to provide a range of services
and petroleum based products and services, create advantages for us when
compared to our competitors.
An
objective of our business strategy is to become the leading “single source”
provider of petroleum products and services in the markets we currently operate
in, as well as expanding into additional contiguous markets. To
achieve this objective we plan to focus on increasing revenues in our core
operations and in expanding through selective acquisitions.
OVERVIEW
|
·
|
During
fiscal 2009, we achieved improvements in our operating income, bottom line
and EBITDA results (in thousands):
|
|
|
Fiscal 2009
|
|
|
Fiscal 2008
|
|
|
Change
|
|
|
% change
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating
income
|
|
$
|
1,685
|
|
|
$
|
(1,969
|
)
|
|
$
|
3,654
|
|
|
|
N/A
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
|
$
|
(6,769
|
)
|
|
$
|
4,430
|
|
|
|
65
|
%
|
Less:
Non-cash FAS 84 Inducement on extinguishment
|
|
|
1,651
|
|
|
|
-
|
|
|
|
1,651
|
|
|
|
N/A
|
|
Adjusted
net loss before non-cash FAS 84 inducement
|
|
$
|
(688
|
)
|
|
$
|
(6,769
|
)
|
|
$
|
6,081
|
|
|
|
90
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
- Non GAAP Measure - reconciliation below
|
|
$
|
4,530
|
|
|
$
|
1,240
|
|
|
$
|
3,290
|
|
|
|
265
|
%
|
|
·
|
We
are reporting operating income for fiscal 2009 of $1.7 million
compared to an operating loss of $2.0 million in fiscal 2008, an
improvement of $3.7 million. We are also reporting a net loss for
fiscal 2009 of $2.3 million most of which is the result of a $1.7 million
non-cash charge in the fourth quarter reflecting the application of
FAS No. 84 to a portion of our $40 million Recapitalization
transaction in June of 2009. We believe that a
meaningful Non-GAAP representation of the results of operations
for fiscal 2009 would be the $688,000 Non-GAAP adjusted net loss before
non-cash FAS 84 inducement that when compared to the $6.8 million loss of
the prior year (which did not include any FAS 84 conversion inducement
charge), shows an improvement of $6.1 million, or 90%. In
particular, FAS No. 84 requires the exchange of outstanding
convertible debt securities for shares of common stock in the
Recapitalization to be treated as a conversion inducement notwithstanding
the highly beneficial economic substance of the overall transaction to the
Company. This non-cash accounting charge has been included in
our Consolidated Statement of Operations but does not reflect the highly
positive economic substance of the June 2009 Recapitalization, which
provided us with enormous short term and long term financial benefits that
are inconsistent with the FAS 84 noncash accounting charges.
See Note 4, Recapitalization.
|
|
|
|
|
·
|
In
addition, in the Recapitalization the Company redeemed of all the
outstanding Series A, Series B, and Series C preferred shares into Common
Stock. The application of FAS 84 and EITF No. D-42,
“The Effect on the
Calculation of Earnings per Share for the Redemption or Induced Conversion
of Preferred Stock,
” to the preferred
shares redemption resulted in a $1.7 million non-cash deemed
dividend. While the $1.7 million non-cash deemed dividend does not
impact the Consolidated Statement of Operations, it is included in the
calculation of the Net loss attributable to common shareholders of $0.31
loss per share in fiscal 2009. We believe that a meaningful
representation of the results of operations on a per share basis would be
the $0.08 loss per share which excludes both the non-cash FAS 84
inducement and the non-cash deemed dividend as both of those calculations
are the result of the Recapitalization and not of the ongoing performance
of the business. See Note 4 –
Recapitalization.
|
|
·
|
In
addition to the $1.7 million non-cash charge, the net loss for fiscal 2009
reflects other non-cash charges of $3.4 million, such as depreciation and
amortization of assets, debt costs, debt discounts, stock-based
compensation, and provision for doubtful accounts. The net loss
also reflects stated rate interest expense associated with servicing of
our debt of $2.1 million, which expense is expected to be reduced by more
than $1 million in the upcoming year as a result of the June 2009
Recapitalization, legal expenses of $950,000 and public company costs of
$864,000.
|
|
·
|
EBITDA,
a non-GAAP measure, increased by $3.3 million or 265% from $1.2 million in
fiscal 2008 to $4.5 million in fiscal
2009.
|
|
·
|
As noted, on June 29, 2009, we
completed a $40 million Recapitalization. The
Recapitalization had an immediate reduction of our total debt of
$4.5 million, reduced our annual servicing expense for interest
a
nd dividends by
over $1 million,
increased
shareholders’ equity by at least
$4
.1
million
and reduced o
ur debt to equity ratio from
approximately 9
to 1
to 2
to 1 from June 30, 2008 to June
30, 2009, respectively.
The contribution of the
Recapitalization to our financial strength and stability going forward is
incontrovertible.
|
|
·
|
In the June 2009
Recapitalization,
we
extinguished all of
our outstanding
non-bank debt and preferred stock
by
enter
ing
into various agreements with
dozens of
our
then
existing debt
and equity investors
. This
extinguishment included
$8.859 million in outstanding
August 2007 11.5% Senior Secured Convertible Promissory Notes (the
“
Secured
Notes
”); $725,000 in
outstanding September 2008 12% Unsecured Convertible Promissory Notes
(“
Existing Unsecured
Notes
”); $2.263
million in 12% Cumulative Dividend Convertible Series A Preferred Stock
(“
Series A
Preferred
”); $1.787
million in 12% Cumulative Dividend Convertible Series B Preferred Stock
(“
Series B
Preferred
”);
$149,000 in 12% Cumulative Dividend Convertible Series C Preferred Stock
(“
Series C
Preferred
”)
and $617,000 in accrued but unpaid interest and dividends on
the Secured Notes, the Existing Unsecured Notes and the Series A, Series B
and Series C Preferred
Stock.
|
|
·
|
As part of the Recapitalization,
we
convert
ed
our
then
existing $25 million revolving
line of credit into a new, significantly more favorable, $25 million loan
facility
. We entered into the
Eighteenth Amendment to the Loan and Security Agreement with
our
principal
lender, Wachovia Bank
, obtaining a new credit facility
which consists
of a
three year $20 million revolv
ing loan
coupled with a new $5 million
5.5%, 60 month, fully amortized term loan. The proceeds of the
term loan were then applied to pay down $4.867 million of the Secured
Notes and $125,000 of the Unsecured Notes.
The
Eighteenth Amendment
also
extended the renewal date of the
revolving line of credit to July 1, 2012, added
our
vehicles and field operating
equipment as additional collateral for the
B
ank, and modified several
covenants in the loan agreement in a manner favorable to
us
. The Bank’s
3 year
extension of the
line of credit
and the other beneficial terms
of the Eighteenth Amendment
including the issuance of a 5
year term loan,
were
the foundation upon which
we were
able to build the various
other
transactions comprising the
R
ecapitalization.
|
|
·
|
To complete the extinguishment of
our
existing debt and senior equity
securities,
we
exchanged
11.5% and
12% high yield securities
held by our debt and preferred
shares holders
for
lower yield 5.5% debt or equity securities or shares of
our
Common Stock. As a
result,
we
issued (i) 3,228 shares of a new
5.5% Cumulative Dividend Series D Preferred Stock (“
Series D Preferred
”) at $400 per share, or $0.40
per common share equivalent, for $1.291 million, (ii) 19,251,119 shares of
Common Stock for $0.38 per share, or $7.315 million, and (iii) a 5 year
$0.8 million 5.5% Unsecured Note (the “
New Unsecured Note
”); and paid an additional
$43,934 in cash, which eliminated all of
our
outstanding Series A Preferred,
Series B Preferred, Series C Preferred, Existing Unsecured Notes and
Secured Notes, and any accrued interest and dividends payable
therein.
|
|
·
|
We reduced our
non-bank debt
by
the Recapitalization
, since
the only remaining non-bank debt
is the New Unsecured
Note, a five year, 5.5% interest only subordinated promissory note for
$800,000 issued to an existing institutional investor in exchange for
$800,000 of its $1 million Secured Note. The institutional
investor exchanged the $200,000 balance of the Secured Note for shares of
Common Stock at $0.38 per
share.
|
|
·
|
Our
total debt has decreased $15.0 million or 52% at June 30, 2009 compared to June
30, 2008, partly due to lower fuel prices this year which affect the line
of credit balance but also due to the Recapitalization which had an
immediate reduction of $4.5 million.
|
|
|
|
|
·
|
We
also negotiated more favorable interest rates in the Recapitalization,
thereby reducing our future interest expense obligations. Our
new $5 million term loan interest rate is at a LIBOR floor of 0.75% plus
3.75%, or 4.5%, compared to the 11.5% and 12% that we were paying on the
former Secured and Unsecured debt. Similarly, our new $800,000
unsecured note and our new Series D Preferred Stock series D all have a
yield of 5.5%, respectively, compared to the 12% cumulative dividend on
the extinguished Series A, B and C Preferred Stock. We
also deferred, for the first thirteen months after the June 2009
Recapitalization, all interest on the unsecured notes and dividends for
the preferred stock series D. The improved terms in our bank
line of credit include lowering our current rate from 4.0% to 3.75%, as it
is now based on a LIBOR floor of 0.75% plus 3.00% compared to our former
rate of prime of 3.25% plus 0.75%. The line of credit financial covenants
have also been changed favorably, lowering our fixed charge coverage ratio
to 1.1 to 1.0 from 1.3 to 1.0 and our daily excess availability from
$750,000 to $250,000. We believe that the drastic reduction in
our debt and dividend bearing preferred stock from the Recapitalization
has correspondingly improved our enterprise value and the value of our
Common Stock, even after considering the increase in outstanding Common
Stock in the recapitalization to 35.8 million shares and 42 million shares
on a fully diluted basis.
|
|
|
|
|
·
|
In
July and September 2009 several of the preferred D shareholders converted
2,630 shares into 2,673,056 shares of Common
Stock.
|
|
·
|
The
strengthening of our balance sheet through the Recapitalization also
reflects the continuing improvement of our business during fiscal
2009. While the difficult economic environment has affected
demand from existing customers, we have maintained our customer base, and
we have added new customers, as evidenced by the expansion of our services
during this fiscal year into two new states and five new territories. The
trend of steadily improving financial performance, which started in the
fourth quarter of fiscal 2008, continued during fiscal 2009, as we
reported higher net margins, and operating income, and improved
EBITDA versus the same period a year ago. We continue to
operate more efficiently than in prior periods, partially as a result of
our fully developed infrastructure and ERP system, both of which
facilitated our timely reaction to changing economic conditions during the
second quarter of fiscal 2009, when we quickly adjusted our costs in
response to decreasing volumes as a result of the rapid contraction of the
national economy and its impact on our customer
base.
|
|
·
|
At
that time, we responded with various cost cutting measures, including
business restructuring steps, beginning late in November 2008 and through
the remainder of fiscal 2009, to meet the decrease in customer
demand. Our results reflect the impact of eliminating
operating and administrative personnel and maximizing the productivity of
equipment and reducing direct and office operating
expenses. For example, we consolidated delivery routes to
improve efficiencies without sacrificing our high level of customer
service. Moreover, as the economy has contracted, we have
continued to add new customers seeking to reduce their costs of operations
with mobile fueling or replacing their prior service providers for the
higher value solution we provide, which includes greater reliability, a
substantial reduction in service issues and better reporting
metrics. We have also expanded the services we provide to
existing customers, such as the recent addition of mobile fueling services
in North Carolina for the United States Postal Service, which has been our
customer for over 15 years.
|
|
·
|
Financial
results from commercial mobile and bulk fueling services continue to be
largely dependent on the number of gallons of fuel sold and the net margin
per gallon achieved. During fiscal 2009, we experienced a 6.0
million decrease in the number of gallons sold compared to the same period
in fiscal 2008. This decrease is due to lower volumes demanded
by some of our existing customers in response to the weaker economy and to
our pursuit of business with higher net margin contributions, with the
overall decrease partially offset by the volume generated from new
customers. While these volumes represent a decrease from prior
years, in the third quarter of fiscal 2009 we began to see some
stabilization of existing customer demand which trend continued in the
fourth quarter of fiscal 2009. While there can be no assurance
that this year’s downturn in customer volumes has in fact bottomed out, we
remain cautiously optimistic that, in light of the stabilization of
customer demand, our continuing success in adding new customers, and the
cost cutting measures made earlier in the fiscal year, our operations and
financial performance will continue to improve as they did during fiscal
2009.
|
|
·
|
It
is important to note that our net margin in fiscal 2009 was higher on 68
million gallons than it was in fiscal 2008, 2007 and 2006 when we sold 74
million, 85 million and 94 million gallons, respectively. The net margin
per gallon has increased to $0.258 in fiscal 2009 from $0.149 in fiscal
2006, an increase of 73%. These continued higher net margins on
lower volumes are the direct result of our fully implemented ERP system
and the utilization of our margin control tools to eliminate
non-contributory lower margin business, which has allowed for improved
route delivery efficiency including the consolidation of routes and margin
analysis of our marketing group to both assess margin contribution and
decision making more timely. Such elimination allows for
increased capacity of our fleet and for personnel to be deployed for
emergency response business as
needed.
|
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
2007
|
|
|
2006
|
|
Net
Margin
|
|
$
|
17,517
|
|
|
$
|
14,354
|
|
|
$
|
14,333
|
|
|
$
|
14,076
|
|
Net
Margin per gallon (in dollars)
|
|
$
|
0.258
|
|
|
$
|
0.194
|
|
|
$
|
0.169
|
|
|
$
|
0.149
|
|
Total
Gallons
|
|
|
67,902
|
|
|
|
73,871
|
|
|
|
84,899
|
|
|
|
94,261
|
|
TRENDS IN
FISCAL YEAR 2009 TO DATE
|
·
|
We
began our 2009 fiscal year with a strong first quarter during which we
achieved improved results in several of our key financial categories when
compared to the fourth quarter of our 2008 fiscal year. These
improvements included increases in gross profit of 36%, a change from net
loss to net income of $878,000 and an EBITDA increase of
72%. While emergency storm response work contributed to some of
these strong results, we believe that the most important factor was the
significant margin contribution stemming from the efficiencies generated
by the ERP system and our focus on higher margin
business.
|
|
·
|
While
we ended our first quarter of fiscal 2009 with optimism in regards to our
improving bottom-line performance, our operations were materially impacted
in the second quarter of fiscal 2009 by the down spiraling worldwide
economy and its dramatic effect on our approximately 4,600 customers
across virtually all U.S. manufacturing and service
sectors. When comparing the second quarter of fiscal 2009 to
the first quarter, it was apparent that the dramatic economic downturn
yielded a reduction in gallons sold of 11% net of any additions
attributable to new business, and contributed to a decrease in gross
profit of 43%, a $1.2 million change from net income to net loss and an
EBITDA decrease of 65%. We did respond decisively, however, in
November and December 2008 to this sudden reduction in customer demand by
making significant reductions in costs, improving the efficiencies in all
of our operating areas and expanding into five new markets and two states
to meet demand for our services.
|
|
·
|
We
believe that our fully operational corporate infrastructure and ERP system
underpinned our ability to execute the tactical measures that we initiated
in the second quarter of fiscal 2009 and put us back on track toward the
financial performance that we had previously anticipated coming out of the
first quarter of 2009. When comparing the third and second
quarters of fiscal year 2009, we realized material improvements in all the
key financial categories, including an increase in gross profit of 15%, a
reduction in net loss of 63%, together with an EBITDA increase of
41%. The key to our improved performance was the 25-cent net
margin per gallon we achieved in the third fiscal quarter, a 4-cent or 19%
improvement from the second quarter which resulted from improved
efficiencies and focus on higher margin
business.
|
|
·
|
We
continued the positive trends of the third quarter into the fourth quarter
with a sales volume of 16.7 million gallons, which is a slight
increase in gallons sold of 4% as compared to the third quarter of fiscal
2009. While the GAAP reported net loss for the fourth quarter of
fiscal 2009 was $1.9 million, it was only $297,000 before the $1.7 million
non-cash FAS 84 inducement charge for the extinguishment of the
convertible debt securities, which would have been a slight increase from
the third quarter and a decrease of 19% compared to the net loss of
$366,000 in the fourth quarter of fiscal
2008.
|
|
·
|
We
currently expect the stabilization of customer demand that we saw at the
end of fiscal 2009 to continue in fiscal 2010 and believe that the demand
from new customers for our services is strong. However, we are
unable to predict an improvement in demand from our existing customers in
the short run. There can be no assurance that a continuation or
a worsening of the current adverse economic condition will not further
adversely impact our customers and, in turn, our
business.
|
The
following table presents certain operating results for the last eight sequential
quarters (in thousands, except net margin per gallon):
|
|
For
the three months ended
|
|
|
|
June
30,
|
|
|
March 31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
39,884
|
|
|
$
|
34,982
|
|
|
$
|
45,112
|
|
|
$
|
79,271
|
|
|
$
|
82,036
|
|
|
$
|
64,162
|
|
|
$
|
58,994
|
|
|
$
|
55,497
|
|
Gross
profit
|
|
$
|
3,539
|
|
|
$
|
3,790
|
|
|
$
|
3,292
|
|
|
$
|
5,819
|
|
|
$
|
4,290
|
|
|
$
|
2,875
|
|
|
$
|
2,565
|
|
|
$
|
3,182
|
|
Selling,
general and administrative
|
|
$
|
3,401
|
|
|
$
|
3,455
|
|
|
$
|
3,267
|
|
|
$
|
4,632
|
|
|
$
|
3,845
|
|
|
$
|
3,445
|
|
|
$
|
3,788
|
|
|
$
|
3,803
|
|
Operating
income (loss)
|
|
$
|
138
|
|
|
$
|
335
|
|
|
$
|
25
|
|
|
$
|
1,187
|
|
|
$
|
445
|
|
|
$
|
(570
|
)
|
|
$
|
(1,223
|
)
|
|
$
|
(621
|
)
|
Interest
expense and
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
other
income, net
|
|
$
|
(454
|
)
|
|
$
|
(570
|
)
|
|
$
|
(677
|
)
|
|
$
|
(667
|
)
|
|
$
|
(811
|
)
|
|
$
|
(720
|
)
|
|
$
|
(763
|
)
|
|
$
|
(757
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
FAS 84 inducement on extinguishment
|
|
$
|
(1,651
|
)
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Gain
(loss) on extinguishment of promissory notes
|
|
$
|
27
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(108
|
)
|
|
$
|
-
|
|
|
$
|
(1,641
|
)
|
Net
income (loss)
|
|
$
|
(1,948
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
$
|
(366
|
)
|
|
$
|
(1,398
|
)
|
|
$
|
(1,986
|
)
|
|
$
|
(3,019
|
)
|
Less: Non-cash
FAS 84 inducement on extinguishment
|
|
$
|
1,651
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Adjusted net (loss) income before non-cash FAS 84
inducement
3
|
|
$
|
(297
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
$
|
(366
|
)
|
|
$
|
(1,398
|
)
|
|
$
|
(1,986
|
)
|
|
$
|
(3,019
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
EBITDA
1
|
|
$
|
876
|
|
|
$
|
974
|
|
|
$
|
690
|
|
|
$
|
1,990
|
|
|
$
|
1,154
|
|
|
$
|
277
|
|
|
$
|
(387
|
)
|
|
$
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
margin
|
|
$
|
3,795
|
|
|
$
|
4,027
|
|
|
$
|
3,534
|
|
|
$
|
6,161
|
|
|
$
|
4,611
|
|
|
$
|
3,228
|
|
|
$
|
2,945
|
|
|
$
|
3,569
|
|
Net margin per gallon
2
|
|
$
|
0.23
|
|
|
$
|
0.25
|
|
|
$
|
0.21
|
|
|
$
|
0.33
|
|
|
$
|
0.24
|
|
|
$
|
0.18
|
|
|
$
|
0.16
|
|
|
$
|
0.19
|
|
Gallons
sold
|
|
|
16,709
|
|
|
|
16,041
|
|
|
|
16,602
|
|
|
|
18,550
|
|
|
|
19,024
|
|
|
|
18,102
|
|
|
|
18,050
|
|
|
|
18,695
|
|
1
EBITDA is defined as earnings before
interest, taxes, depreciation, and amortization,
a non-GAAP financial
measure within the meaning of Regulation G promulgated by the Securities and
Exchange Commission. To the extent that gain or loss and the non-cash
FAS 84 inducement on extinguishment of debt constitutes the recognition of
previously deferred interest or finance cost, it is considered interest expense
for the calculation of certain interest expense amounts. We believe
that EBITDA provides useful information to investors because it excludes
transactions not related to the core cash operating business
activities. We believe that excluding these transactions allows
investors to meaningfully trend and analyze the performance of our core cash
operations.
2
Net
margin per gallon is calculated by adding gross profit to the cost of sales
depreciation and amortization and dividing that sum by the number of gallons
sold.
3
Adjusted
net (loss) income before non-cash FAS 84 inducement is shown to provide the
reader of the true economic performance of the Company before the impact of a
technical non-economic substantive accounting charge of $1.7
million. We believe that this is a meaningful Non-GAAP representation
of the ongoing performance of the operations excluding the effect of a charge
that was strictly related to the Recapitalization. See Note 4 –
Recapitalization for details.
The
following table reconciles EBITDA to the net income (loss) for each of the eight
quarterly periods presented above (in thousands):
|
|
For
the three months ended
|
|
|
|
June
30,
|
|
|
March 31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
June
30,
|
|
|
March
31,
|
|
|
December
31,
|
|
|
September
30,
|
|
|
|
2009
|
|
|
2009
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2008
|
|
|
2007
|
|
|
2007
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
income (loss)
|
|
$
|
(1,948
|
)
|
|
$
|
(243
|
)
|
|
$
|
(660
|
)
|
|
$
|
512
|
|
|
$
|
(366
|
)
|
|
$
|
(1,398
|
)
|
|
$
|
(1,986
|
)
|
|
$
|
(3,019
|
)
|
Add
back:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
545
|
|
|
|
575
|
|
|
|
680
|
|
|
|
683
|
|
|
|
720
|
|
|
|
780
|
|
|
|
782
|
|
|
|
778
|
|
Income
tax expense
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
8
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Depreciation and
amortization expense:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
254
|
|
|
|
239
|
|
|
|
242
|
|
|
|
342
|
|
|
|
321
|
|
|
|
353
|
|
|
|
380
|
|
|
|
388
|
|
Selling,
general and administrative expenses
|
|
|
344
|
|
|
|
334
|
|
|
|
342
|
|
|
|
341
|
|
|
|
357
|
|
|
|
311
|
|
|
|
304
|
|
|
|
282
|
|
Stock-based
compensation expense
|
|
|
49
|
|
|
|
61
|
|
|
|
78
|
|
|
|
104
|
|
|
|
122
|
|
|
|
123
|
|
|
|
133
|
|
|
|
126
|
|
Non-cash
FAS 84 inducement on extinguishment
|
|
|
1,651
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
(Gain)
loss on extinguishment of promissory notes
|
|
|
(27
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
108
|
|
|
|
-
|
|
|
|
1,641
|
|
EBITDA
|
|
$
|
876
|
|
|
$
|
974
|
|
|
$
|
690
|
|
|
$
|
1,990
|
|
|
$
|
1,154
|
|
|
$
|
277
|
|
|
$
|
(387
|
)
|
|
$
|
196
|
|
The
following table reconciles Adjusted basic and diluted net loss per share
attributable to common shareholders excluding non-cash FAS 84 inducement and
non-cash deemed dividends on extinguishment of convertible notes and preferred
shares for fiscal 2009 and fiscal 2008:
|
|
Fiscal
2009
|
|
|
Fiscal
2008
|
|
|
Change
|
|
|
%
change
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
|
$
|
(6,769
|
)
|
|
$
|
4,430
|
|
|
|
65
|
%
|
Preferred
stock dividends
|
|
|
(577
|
)
|
|
|
(249
|
)
|
|
|
(328
|
)
|
|
|
(132
|
)%
|
Non-cash
deemed dividends for preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A, B and C redemption to common stock
|
|
|
(1,746
|
)
|
|
|
-
|
|
|
|
(1,746
|
)
|
|
|
N/A
|
|
Net
loss attributable to common shareholders
|
|
$
|
(4,662
|
)
|
|
$
|
(7,018
|
)
|
|
$
|
2,356
|
|
|
|
34
|
%
|
Less: Non-cash
deemed dividends for preferred stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A, B and C redemption to common stock
|
|
|
1,746
|
|
|
|
-
|
|
|
|
1,746
|
|
|
|
N/A
|
|
Less: Non-cash
FAS 84 Inducement on extinguishment
|
|
|
1,651
|
|
|
|
-
|
|
|
|
1,651
|
|
|
|
N/A
|
|
Adjusted
net loss attributable to common shareholders
|
|
$
|
(1,265
|
)
|
|
$
|
(7,018
|
)
|
|
$
|
5,753
|
|
|
|
82
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
basic and diluted net loss per share attributable to common shareholders
excluding non-cash FAS 84 inducement and deemed dividends on
extinguishment of convertible notes and preferred shares
|
|
$
|
(0.08
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
0.41
|
|
|
|
84
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share attributable to common
shareholders
|
|
$
|
(0.31
|
)
|
|
$
|
(0.49
|
)
|
|
$
|
0.18
|
|
|
|
37
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted
Basic and diluted weighted average common shares
outstanding
|
|
|
15,097
|
|
|
|
14,467
|
|
|
|
630
|
|
|
|
4
|
%
|
Adjusted
Basic and diluted net loss per share attributable to common shareholders
excluding non-cash FAS 84 inducement and deemed dividends on extinguishment of
convertible notes and preferred shares is a non-GAAP measure that excludes the
effect of a charge and dividends that were strictly related to the
Recapitalization. We believe that excluding them in this
non-GAAP calculation provides a meaningful representation of the ongoing
performance of the operations of the Company.
RESULTS
OF OPERATIONS:
To
monitor our results of operations, we review key financial information,
including net revenues, gross profit, selling, general and administrative
expenses, net income or losses, and non-GAAP measures, such as
EBITDA. We continue to seek ways to more efficiently manage and
monitor our business performance. We also review other key operating
metrics, such as the number of gallons sold and net margins per gallon
sold. As our business is dependent on the supply of fuel and
lubricants, we closely monitor pricing and fuel availability from our suppliers
in order to purchase the most cost effective products. We calculate
our net margin per gallon by adding gross profit and the depreciation and
amortization components of cost of sales, and dividing that sum by the number of
gallons sold.
Comparison
of Year Ended June 30, 2009 (“fiscal 2009”) to Year Ended June 30, 2008 (“fiscal
2008”)
Revenues
Revenues
were $199.2 million in fiscal 2009 compared to $260.7 million in fiscal 2008, a
decrease of $61.5 million, or 24%, primarily as a result of price variances,
which resulted in a decrease in revenues of $43.9 million, due to lower market
prices of petroleum products during fiscal 2009, as compared to fiscal
2008. Overall, during fiscal 2009, market fuel prices were
approximately 28% lower compared to the same period a year ago, as disclosed by
the Energy Information Administration for spot prices for low-sulfur No. 2
Diesel Fuel in the U.S. Gulf Coast. The decrease in revenues is also
partially due to a decrease in gallons sold, which resulted in a decrease of
$17.5 million in revenues compared to the prior year.
As the
result of the rapid contraction of the American economy during the first half of
fiscal 2009, we saw a dramatic and significant overall decrease in volume demand
from our existing customers beginning in November 2008. Accordingly,
notwithstanding our addition of new customers during the year, the overall
reduction in gallons sold was 6.0 million gallons, or 8%, during fiscal 2009
compared to the previous fiscal year. Towards the end of fiscal 2009,
we began to see some stabilization in the demand for our services from existing
customers with our volumes remaining at similar levels during the last three
quarters. While fuel prices have decreased dramatically since the
beginning of fiscal 2009, we have not seen any direct connection between the
decrease of fuel prices and increased fuel usage by our existing customers, as
the overall recessionary condition of the economy and its impact on our
customers’ businesses appears to be outweighing any elasticity of demand based
on price. We continue to remain cautiously optimistic, however, that
customer demand for our services will not decline further and that we can
maintain or increase present volume levels by attracting new
customers.
Gross Profit
Gross
profit was $16.4 million in fiscal 2009 compared to $12.9 million in fiscal
2008, an increase of $3.5 million, or 27%. The net margins per gallon
for fiscal 2009 and 2008 were 25.8 cents and 19.4 cents,
respectively. This improvement was the result of the continued trend
in higher net margin per gallon established in the fourth quarter of fiscal year
2008, the improved efficiencies related to our route structure consolidation and
increased productivity as well as the incremental margin contribution from the
emergency response services provided in Louisiana and Texas for Hurricanes
Gustav and Ike.
Selling, General and Administrative
Expenses
Selling,
general and administrative (“SG&A”) expenses were $14.8 million in fiscal
2009 compared to $14.9 million in fiscal 2008, a decrease of 1%. As a
result of the cost cutting and business restructuring steps taken beginning in
late November 2008 to meet the decrease in customer demand, we reduced employee
expense by $742,000
. This decrease was
offs
et by increases in legal expenses of $366,000
,
provision for doubtful accounts
of $169,000 and depreciation expense of $107,000.
Interest Expense
Interest
expense was $2.5 million in fiscal 2009, as compared to $3.1 million in the
same period of the prior year, a decrease of $577,000, or 19%. The
decrease was primarily due to lower interest expense associated with our line of
credit as the base interest rate and the average outstanding balances have
decreased year over year. The base interest rate has decreased to
4.0% at June 30, 2009 from 5.75% at June 30, 2008, and the weighted average rate
has decreased to 5.04% this fiscal year from 7.58% during the prior fiscal
year. Additionally, the average outstanding balance on the line of
credit was $3.7 million lower period over period primarily due to lower
commodity fuel prices. Included in the long-term debt interest
expense for fiscal 2009 is the $96,000 deferral fee that we incurred to extend
the interest payment on the August 2007 and September 2008
Notes. Without the deferral fee, the reduction in interest expense
would have been $673,000, or 22%, from fiscal 2008.
The
components of interest expense are as follows (in thousands):
|
|
Year Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Stated
Rate Interest Expense:
|
|
|
|
|
|
|
Line
of credit
|
|
$
|
787
|
|
|
$
|
1,267
|
|
Long
term debt
|
|
|
1,093
|
|
|
|
1,270
|
|
Other
|
|
|
208
|
|
|
|
125
|
|
Total
stated rate interest expense
|
|
|
2,088
|
|
|
|
2,662
|
|
|
|
|
|
|
|
|
|
|
Non-Cash
Interest Amortization:
|
|
|
|
|
|
|
|
|
Amortization
of deferred debt costs
|
|
|
305
|
|
|
|
318
|
|
Amortization
of debt discount
|
|
|
42
|
|
|
|
80
|
|
Other
|
|
|
48
|
|
|
|
-
|
|
Total
non-cash interest amortization
|
|
|
395
|
|
|
|
398
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense
|
|
$
|
2,483
|
|
|
$
|
3,060
|
|
As a result of the June 2009
Recapitalization the Company expects to reduce its interest and dividend expense
obligation by over $1 million a year. This is the result of reducing
debt by $4.5 million and negotiating better interest rates.
Gain/Loss
on Extinguishment of Promissory Notes
In fiscal
year 2009, as a result of the June 2009 Recapitalization, we recorded a net gain
of extinguishment of $27,000. This net gain on extinguishment is the
result of the recording at fair value the common stock and the Series D
Preferred Stock issued to extinguish a portion of the August 2007 notes and the
September 2008 notes, offset by the write offs of unamortized debt costs of
$118,000 and unamortized debt discounts of $23,000 related to the exchanged
notes.
In fiscal
year 2008, we recorded losses on extinguishment of debt of $1.7
million. The losses are related to write offs of costs net of gain
realized as a result of the August 2007 refinancing of our outstanding secured
promissory notes issued on August 2003, January 2005 and September 2005 with new
senior secured convertible subordinated notes and the exchange of $3.8 million
of the debt of the November 2007 Notes and a portion of the August 2007 Notes
into Series A and Series B Preferred Stock.
The
following summarizes the components of the net (gain)/loss on extinguishment of
promissory notes that we recorded in our consolidated statements of operations
during fiscals 2009 and 2008 (in thousands):
|
|
Year Ended
|
|
|
|
June 30, 2009
|
|
Write
offs of costs and gain related to exchanged August 2007 Notes under
the
|
|
|
|
Recapitalization:
|
|
|
|
Unamortized
debt costs
|
|
$
|
118
|
|
Unamortized
debt discounts
|
|
|
23
|
|
Gain
on extinguishment of August 2007 Notes
|
|
|
(145
|
)
|
Gain
on extinguishment of September 2008 Notes
|
|
|
(23
|
)
|
Gain
on extinguishment of promissory notes, net
|
|
$
|
(27
|
)
|
|
|
Year
Ended
|
|
|
|
June
30, 2008
|
|
Write
offs of costs and gain related to the refinancing of the August
2003,
|
|
|
|
|
January
2005 and September 2005 Notes:
|
|
|
|
|
Unamortized
debt costs
|
|
$
|
443
|
|
Unamortized
debt discounts
|
|
|
978
|
|
Cash
pre-payment penalty
|
|
|
270
|
|
Gain
on extinguishment
|
|
|
(50
|
)
|
|
|
|
|
|
Write
off of unamortized debt costs related to the exchanged November 2007 Notes
for Preferred Stock Series A
|
|
|
24
|
|
Write
offs related to exchanged August 2007 Notes for Preferred Stock Series
B:
|
|
|
|
|
Unamortized
debt costs
|
|
|
69
|
|
Unamortized
debt discounts
|
|
|
15
|
|
Loss
on extinguishment of promissory notes, net
|
|
$
|
1,749
|
|
Non-Cash
FAS 84 Inducement on Extinguishment
Also in
the Recapitalization, the Company extinguished a portion of the August 2007 and
the September 2008 Notes (“the Notes”) through the issuance of 5,330,658 shares
and 1,249,999 shares of Common Stock, respectively, at the negotiated price of
$0.38 per share, which was higher than the $0.37 per share closing bid price on
the trading day immediately preceding the June 29, 2009
Recapitalization. The original terms of the Notes allowed for a
conversion of 50% of the August 2007 Notes and 100% of the September 2008 Notes
into common stock. The negotiated issuance price of $0.38 per share
in the Recapitalization was based on then current market prices, and it was
lower than the original conversion prices of $1.46 per share and $0.65 per share
of the August 2007 Notes and the September 2008 Notes,
respectively. Since the extinguishment of the Notes through issuance
of Common Stock was done at close to current market prices of the Common Stock,
the Company issued an aggregate of 4,462,456 more shares than it would have
issued for the convertible equivalent under the original terms of the
Notes.
Statement
of Financial Accounting Standards No. 84, “Induced Conversion of Convertible
Debt (as amended)” (“FAS No. 84”), specifies the method of accounting
for conversions of convertible debt to equity securities when the debtor induces
conversion of the debt by offering additional securities or other consideration
to convertible debt holders. In accordance with FAS No. 84, an
expense is recognized if and to the extent that “additional consideration is
paid to debt holders for the purpose of inducing prompt conversion of the debt
to equity securities (sometimes referred to as a convertible debt
‘sweetener’).” While the Company’s purpose in effecting the June 2009
Recapitalization was to effect a complete restructuring of its debt and equity
structure via a series of transactions that would have the effect of reducing
its outstanding debt and future obligations and there was no intent to induce
any conversion of the outstanding debt to common stock, a portion of the
exchange of the outstanding carrying value of $9.6 million in
convertible debt for an equal aggregate value of cash, common stock and
preferred stock is required by FAS No. 84 to be accounted for as an induced
conversion of outstanding debt securities. While we believe that the
application of FAS No. 84 does not reflect the economic substance of the value
exchanged in this portion of the Recapitalization transaction, we have reported
the required non-cash charge of approximately $1.65 million for the difference
between the number of common shares issued compared to the number of common
shares that would have been issued under the original terms of the convertible
debt instrument, times the market price on the conversion date.
The
Company understands that the accounting interpretation of FAS No. 84 is that an
inducement occurs any time additional shares are issued in the extinguishment of
convertible debt regardless of the absence of an economic loss or economic
intent of the parties to the transaction. As a result, the
application of FAS No. 84 to the exchange of existing convertible debt
securities for common stock resulted in the recording of a non-cash “inducement”
accounting charge of $1.65 million, which was a calculation of the difference
between the 2,118,201 common shares that would have been issuable to the
applicable note holder under the original conversion rights that existed in the
convertible Notes and the 6,580,657 common shares exchanged at $0.38 cents upon
the extinguishment. The shares amounts include the impact of the July
6, 2009 transaction as describe in Note 15 – Subsequent Events. This
non-cash charge is deemed a financing expense to extinguish the Notes and it is
included in the Consolidated Statements of Operations with a corresponding
increase in Additional paid-in capital and therefore the net impact has no
effect to total Shareholder’s Equity.
Income Taxes
State income tax expense of $32,000 was
recorded in fiscal 2009. No federal income tax expense was recorded
in fiscal 2009 and fiscal 2008. The net operating loss carryforward
at June 30, 2009 was $28.1 million, which includes a $2.2 net operating loss
carryforward acquired in connection with the H & W
acquisition.
Net Loss
Net loss was $2.3 million
in fiscal 2009, compared to $6.8 million
in fiscal 2008, a reduction of 65%. The net loss in fiscal 2009
includes a $1.7 million non-cash FAS 84 inducement on extinguishment charge as
discussed above. Excluding this charge, the
$6.1 million, or
90% improvement over prior year was primarily due to an increase of $3.5 million
in gross profit, which stemmed from an overall higher net margin per gallon,
including higher margin contributions from emergency response services performed
during the first quarter of the fiscal year, efficiencies derived from our ERP
system, and a variety of cost cutting measures implemented this fiscal year in
response to decreases in customer demand. Additionally, interest
expense was $577,000 lower this year due to a combination of lower debt balances
and lower interest rates. The net loss in fiscal 2008 included a net
loss on extinguishment of debt of $1.7 million arising from the August 2007
refinancing of various outstanding promissory notes with new senior secured
convertible subordinated notes and the conversion of debt into preferred
stock.
EBITDA – Non-GAAP
Measure
As noted above, EBITDA is
a
non-GAAP financial measure within the meaning of Regulation G promulgated by the
Securities and Exchange Commission.
EBITDA is defined as earnings before
interest, taxes, depreciation, and amortization.
To the extent that gain
or loss and the non-cash FAS 84 inducement on extinguishment of debt constitutes
the recognition of previously deferred interest or finance cost, it is
considered interest expense for the calculation of certain interest expense
amounts.
We believe
that EBITDA provides useful information to investors because it excludes
transactions not related to the core cash operating business
activities. We believe that excluding these transactions allows
investors to meaningfully trend and analyze the performance of our core cash
operations.
EBITDA was $4.5 million in fiscal 2009
compared to $1.2 million
in
fiscal 2008, an
increase of $3.3 million or approximately 265%
improvement. The increase in EBITDA was due to the increase in gross
profit of $3.5 million due to higher net margin per gallon for the period,
including the incremental margin contribution from the emergency response
services.
The
reconciliation of EBITDA to net loss for fiscals 2009 and 2008 was as follows
(in thousands):
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,339
|
)
|
|
$
|
(6,769
|
)
|
Add back:
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
2,483
|
|
|
|
3,060
|
|
Income tax
expense
|
|
|
32
|
|
|
|
-
|
|
Depreciation and amortization
expense:
|
|
|
|
|
|
|
|
|
Cost of
sales
|
|
|
1,077
|
|
|
|
1,442
|
|
Selling, general and
administrative expenses
|
|
|
1,361
|
|
|
|
1,254
|
|
Stock-based compensation
amortization expense
|
|
|
292
|
|
|
|
504
|
|
Non-cash FAS 84 inducement on
extinguishment
|
|
|
1,651
|
|
|
|
-
|
|
(Gain)loss on extinguishment of
promissory notes
|
|
|
(27
|
)
|
|
|
1,749
|
|
EBITDA
|
|
$
|
4,530
|
|
|
$
|
1,240
|
|
Capital
Resources and Liquidity
At June
30, 2009 and 2008, we had total cash and cash availability of $2.5 million and
$1.9 million. At June 30, 2009, cash and cash availability consisted
of cash and cash equivalents of $123,000 and additional cash availability of
approximately $2.4 million through our line of credit. As of
September 23, 2009, our cash and cash availability was approximately $2.5
million. Our ability to draw on our line of credit is also subject to
our compliance with the respective debt covenant requirements.
The rapid
escalation of fuel prices in fiscal 2008, which continued into most of the first
quarter of fiscal 2009, adversely affected our capital resources at the
beginning of our fiscal year. Historically, while we generally
avoided the impact of higher fuel prices by passing along the higher prices to
our customers, the higher costs for operating our own delivery fleet and the
decreased demand for the services and goods provided by most of our customer
base, and in turn, those customers’ demand for fuel, had an indirect effect on
our profitability with increased costs and lower volumes. The higher
fuel prices had also substantially increased the amount of credit that we needed
to obtain from our suppliers of fuel. In turn, this higher demand for
credit led to limitations on the adequacy of the supplier credit historically
available to us and increased our costs of obtaining additional
credit. We addressed the limitations on supplier credit by issuing
short-term notes to a limited number of investors in November 2007, the proceeds
from which we used for credit enhancements in those markets where our credit was
most limited. These notes were subsequently exchanged for Series A
Preferred Stock in February 2008, which strengthened our balance sheet and
helped us achieve compliance with listing standards of the Nasdaq Stock
Market. The February 2008 exchange of the November 2007 notes for
Series A Preferred Stock and the March 2008 exchange of $1.7 million of the
August 2007 Notes for Series B Preferred Stock, improved our access to supplier
credit. In September 2008, we also sold $725,000 in unsecured
convertible promissory notes to accredited investors to further bolster our cash
resources and liquidity during this demanding period.
The
challenges of the second quarter of fiscal 2009 were substantially different,
however, from those we faced in the first quarter. During the second
quarter, dramatically lower fuel prices somewhat eased the availability of
credit for fuel purchases but rapidly diminishing demand from existing customers
led to overall decreases in volumes of petroleum products and chemicals sold,
which reduced our revenues and our profitability, which is based on a per gallon
service fee.
During
the third quarter of fiscal 2009, while our sales volume from existing customers
continued to decrease, the decline slowed considerably from the rate we saw from
the first to the second quarter, and our volumes seemed to stabilize starting
with the third quarter and through the rest of the fiscal year. We
also saw an increase in new customer business and prospective business at the
end of the third quarter and through the fourth quarter as companies sought to
reduce their costs of operation with mobile fueling and our other
services.
During
the fourth quarter of fiscal 2009, we completed a comprehensive $40 million
recapitalization program that restructured all of our debt and
equity. After the Recapitalization, our total
debt was immediately decreased by $4.5 million, our cash
requirements for interest and dividends are expected to be over $1 million per
year less and our shareholders’ equity increased by more than $4.1
million. A critical component of the June 2009 Recapitalization was
the conversion of our existing $25.0 million revolving line of credit into a
new, significantly more favorable, $25.0 million loan facility, comprised of a
three year $20.0 million revolver coupled with a new $5.0 million 5.5%, 60
month, fully amortized term loan and the extension of our revolving line of
credit to July 1, 2012.
We
believe that, after the Recapitalization, we have established adequate credit
enhancements to meaningfully respond to increases in volumes, irrespective of
whether they are accompanied by fuel price increases, but there can be no
assurance that we will in fact be successful in the face of whatever market
forces affect us and our customers in the future.
Sources
and Uses of Cash
Debt Financing and Equity
Offerings
As noted
above, on June 29, 2009, we completed a comprehensive $40 million
recapitalization program that restructured all of our debt and equity, providing
us with substantial short term and long term financial benefits,
including. the conversion of our then existing $25.0 million
revolving line of credit into a new, significantly more favorable, $25.0 million
loan facility, comprised of a three year $20.0 million revolver coupled with a
new $5.0 million 5.5%, 60 month, fully amortized term loan. The
Eighteenth Amendment to our Loan and Security Agreement with our principal
lender also extended the renewal date of the revolving line of credit from July
1, 2009 to July 1, 2012, added our vehicles and field operating equipment as
additional collateral for the bank, and modified several covenants in the loan
agreement in a manner favorable to the Company.
Our $20.0
million line of credit permits us to borrow up to 85% of the total amount of
eligible accounts receivable and 65% of eligible inventory, both as
defined. Outstanding letters of credit reduce the maximum amount
available for borrowing. Outstanding borrowings under the line are
secured by substantially all Company assets including its transportation fleet
and related field equipment. Our line of credit finances the timing
difference between petroleum product purchases payable generally in 10 to 12
days from date of delivery and the collection of receivables from our customers,
generally in 30 to 45 days from date of delivery.
Interest
is payable monthly based on a pricing matrix agreed with the bank. At
June 30, 2009, the interest rate for the line of credit was at LIBOR Floor
of 0.75 plus 3.00%, or 3.75%. As a result of the Eighteenth
Amendment, the applicable margin for subsequent periods will be determined
quarterly based on a matrix with margins of 3.00% to 3.75% over the LIBOR
lending rate determined by the Company meeting certain EBITDA to fixed charge
coverage ratios, as defined.
At the
end of fiscal 2009, we had outstanding letters of credit for an aggregate
amount of $1.6 million. These letters of credit were issued to obtain
better purchasing terms and pricing than was then available in certain
markets. No amounts have been drawn on any of the letters of credit;
however, as described above, outstanding letters of credit reduce our cash
availability under our line of credit facility.
As of
June 30, 2009 and June 30, 2008, we had outstanding borrowings of
$7.8 million
and $19.8 million,
respectively, under our line of credit.
The line of credit is
classified as a current liability
in accordance with EITF 95-22, “Balance
Sheet Classification of Borrowings Outstanding under Revolving Credit
Agreement”
due to certain
provisions in the agreement providing for subjective acceleration rights and
requiring us to maintain a lockbox arrangement whereby cash deposits are
automatically utilized to reduce amounts outstanding under the line of
credit.
Based on eligible receivables and inventories, and
letters of credit outstanding at June 30, 2009 and 2008, we had
$2.4 million
and $1.8 million,
respectively, of cash availability under the line of credit.
In
addition to obtaining funds through the line of credit, in the past, we have
obtained funds through the issuance of promissory notes, common stock, preferred
stock and warrants to purchase our common stock. We have also
concurrently or subsequently restructured our debt and equity to secure better
terms and to reduce our cash requirements for interest and
dividends.
On August
8, 2007, we sold $11.8 million in debt and equity securities (the “August 2007
Offering”). We used a portion of the proceeds to satisfy the balance
of our outstanding secured promissory notes issued in August 2003, January 2005,
and September 2005, and to lower the total senior secured convertible
subordinated debt from $11.2 million
to $10.6
million. As a result of this transaction, we recognized $1.6 million
in net loss on extinguishment of promissory notes. The net loss
was the result of the write-off of unamortized debt discounts of $978,000,
the write-off of debt
costs of $443,000, a pre-payment penalty of $270,000, which was incurred due to
the satisfaction of the notes prior to their maturity dates, partially offset by
a gain of $50,000 due to the excess of the carrying value of the notes over the
extinguishment price.
In the
August 2007 Offering, we sold $10.6 million in 11½% senior secured convertible
subordinated promissory notes maturing December 31, 2009 (the “August 2007
Notes”), including $5.7 million sold to new institutional and private investors
and $4.9 million to current holders of our secured debt, together with 790,542
shares of common stock (the “Shares”) and 39,528 four-year warrants to purchase
common stock at $1.752 per share (the “Warrants”). All principal on
the August 2007 Notes is due on December 31, 2009. The Shares and
Warrants were sold at $1.48 per Share and one twentieth of a Warrant, or $29.60
for twenty (20) Shares and one (1) Warrant, for total equity proceeds of
$1,170,000. We paid a total commission of $400,000 to the placement
agent, $94,000 of which was paid through the issuance of 63,327 shares of our
common stock at the offering price of $1.48 per share, along with 39,528
warrants with the same terms as the Warrants sold to investors.
The
August 2007 Notes were secured by specified vehicles and field equipment owned
by us and were senior to all other of our existing debt other than any amounts
owed now or in the future to our primary lender, Wachovia Bank, N.A, to which
the August 2007 Notes were expressly subordinated.
The
holders of the Notes had the right to convert up to fifty percent (50%) of the
principal amount of the August 2007 Notes into shares of our common stock at
$1.46 per share. We registered the resale of the Shares under the
Securities Act of 1933, as
amended, including the
Shares into which the August 2007 Notes may be converted and the Shares obtained
upon exercise of the Warrants.
On
November 19, 2007, we obtained an aggregate of $2.0 million from the sale of
unsecured short-term notes to a small group of individual and institutional
investors (the “November 2007 Notes”). The proceeds were used for
general working capital purposes. The November 2007 Notes originally
had a six-month term maturing in May 2008, which was extended to July
2008. Interest paid on the outstanding principal balance of the
November 2007 Notes was 1.5% per month. These notes were exchanged
for preferred stock in February 2008 as described below.
On
February 29, 2008, we sold 4,587 shares of Series A Preferred Stock, $0.01 par
value (the “Series A Preferred Stock”) at $550 per share for an aggregate
purchase price of $2.5 million. In the offering, 3,648 of the shares
were issued by exchanging the entire $2.0 million principal balance of the
November 2007 Notes, plus a portion of the accrued but unpaid interest
thereon. In addition, we sold 939 of the shares for $516,000 in cash
to a small group of investors, which included the sale of 155 shares to certain
of our officers.
On March
12, 2008, we sold 1,985
shares of Series B
Convertible Preferred Stock, $0.01 par value (the “Series B Preferred Stock”) at
$900 per share for an aggregate of $1.8 million by exchanging $1.75
million in principal balance of August 2007 Notes, plus a portion of the
accrued but unpaid interest thereon.
On August
15, 2008, we issued 229 shares of our Series C Convertible Preferred Stock,
$0.01 par value, at a price of $650 per share, or an aggregate of $148,850 (the
“Series C Preferred Stock”). Each share of Series C Preferred Stock
was convertible into 1,000 shares of our common stock at a price per share of
$0.65 per share, which was greater than the $0.49 closing price of our common
stock on August 14, 2008.
On
September 2, 2008, we sold $725,000 in 12% unsecured convertible promissory
notes maturing on September 1, 2010. The promissory notes were
unsecured and were expressly subordinated to any amounts owed now or in the
future to our primary lender pursuant to a subordination agreement between the
note holders and the lender. The unpaid principal amount of the
promissory notes and the accrued but unpaid interest thereon could be converted
into shares of our common stock at $0.65 per share.
In the
third quarter of fiscal 2009, the holders of the August 2007 and September 2008
Notes agreed to defer to April 15, 2009, the $563,000 in interest payments
originally due in January and March 2009. As consideration for the
deferral of these interest payments until April 15, 2009, we paid a deferral fee
equal to 1% of the outstanding principal balance, or $95,000 of which 50% of the
deferral fee was paid in cash, with the remainder satisfied through the issuance
of 170,827 unregistered shares of our common stock. For
purposes of determining the number of
shares to be issued for the stock portion of the deferral fee or upon conversion
of the Payment, shares were valued at $0.29 per share, the official closing
price on the Nasdaq Stock Market on January 22, 2009, the trading day
immediately preceding the effective date of the Agreements.
As noted
above, in the June 2009 Recapitalization, we and our principal lender agreed to
convert our existing $25.0 million revolving line of credit into a new,
significantly more favorable, $25.0 million loan facility, which included a new
$5.0 million fully amortized 60 month term loan (the “Term
Loan”). The proceeds of the Term Loan were used to pay down $4.867
million of the August 2007 Notes and $125,000 of the September 2008
Notes. The interest on the Term Loan is payable monthly based on a
pricing matrix agreed with the bank. At June 30, 2009, the interest
rate was 4.5%. For subsequent periods, the applicable margin will be
based on a matrix determined by meeting certain EBITDA to fixed charge coverage
ratios, as defined.
As part
of the Recapitalization, we entered into various agreements with our existing
debt and equity investors that extinguished all of its existing non-bank debt
and outstanding preferred stock.
We
extinguished the $8.9 million of the August 2007 Notes as follows (in
thousands):
Cash
|
|
$
|
4,867
|
|
Issuance
of Preferred Stock D
|
|
|
1,166
|
|
Issuance
of Common Stock
|
|
|
2,026
|
|
Issuance
of June 2009 Note
|
|
|
800
|
|
|
|
|
|
|
Total
|
|
$
|
8,859
|
|
We used
the majority of the proceeds from the new $5.0 million term loan to extinguish
$4.9 million of the August 2007 Notes. We extinguished $1.2 million of
the August 2007 Notes through the issuance of 2,916 shares of Series D
Convertible Preferred Stock (“Preferred Stock D”) at $400 per
share. We extinguished $2.0 million of the August 2007 Notes
through the issuance of 5,330,658 shares of common stock negotiated at $0.38 per
share. We extinguished $800,000 of the August 2007 Notes through the
issuance of the $800,000 June 2009 Note which is subordinated to all debts owed
to the Bank pursuant to a debt subordination agreement, paying 5.5% annual
interest paid semi-annually with a five year maturity from the date of
issuance. If permitted under the Subordination Agreement, we may
pre-pay the June 2009 Note, in whole or in part, without prepayment penalty or
premium. Twenty-five percent (25%) of the original principal amount
of the June 2009 Note, or $200,000, may be converted into shares of our Common
Stock at $0.50 per share. Since the conversion price of $0.50 per share is
higher than the $0.37 closing market bid price of the day prior to the
transaction date, the June 2009 Note does not contain a beneficial conversion
feature.
Additionally,
we extinguished the $725,000 of the September 2008 Notes as follows (in
thousands):
Cash
|
|
$
|
125
|
|
Issuance
of Preferred Stock D
|
|
|
125
|
|
Issuance
of Common Stock
|
|
|
475
|
|
|
|
|
|
|
Total
|
|
$
|
725
|
|
We used
part of the proceeds from the new $5.0 million term loan to extinguish $125,000
of the September 2008 Notes. We extinguished $125,000 of the September 2008
Notes through the issuance of 312 shares of Series D Convertible Preferred Stock
at $400 per share. Each preferred share is convertible into
1,000 shares of common stock at $0.40 per share. We extinguished
$475,000 of the September 2008 Notes through the issuance of 1,249,999 shares of
common stock at $0.38 per share.
In June
2009, we issued 1,292,439 unregistered shares of Common Stock to the Holders of
the August 2007 and September 2008 Notes as part of the Recapitalization in
payment of $490,000 in outstanding interest.
We
incurred $770,000 in fees related to the Recapitalization, of which $267,000
were recorded to equity and $503,000 to debt, allocated on a percentage
basis. The placement agent received $380,000 in
fees. These fees were paid $100,000 in securities and $280,000 in
cash. For the $100,000 in securities, a total of 263,156 shares of
common stock were issued on June 29, 2009, priced at $0.38, the same price
used for the common stock issued pursuant to the exchange
agreements.
Dividends
on the 3,228 outstanding shares of Series D Preferred Stock, which shares were
issued in the June 2009 Recapitalization, are payable when, as and if declared
by the Board of Directors, but only out of funds that are legally available, in
annual cash or equity dividends, at the Company’s election, at the rate of 5.5%
per annum of the sum of the Original Issue Price per share. Per the
Certificate of Designation for the Series D, the first dividend declaration for
the outstanding Series D Preferred Stock is expected to be approximately in
August 2010 and may, at the Company’s election, be paid in shares of the
Company’s common stock. Subsequent dividends on the Series D are
payable in cash except that, under specified circumstances, dividends may be
paid in the form of shares of a new series of nonvoting Preferred Stock the
terms, rights and privileges of which are, other than the voting rights,
substantially identical to those of the Series D.
Dividends
on any of the Company’s Series of Preferred Stock are cumulative from the date
of the original issuance of the Preferred Stock. Accumulated unpaid
dividends on Preferred Stock do not bear interest.
During
fiscal 2008, we declared cumulative dividends of $249,000 of which $56,000 was
paid during fiscal 2008 and the remainder was paid during fiscal 2009. During
fiscal 2009, we declared $577,000 in cumulative dividends on the Series A,
Series B, and Series C Preferred Stock, which have been paid or satisfied as of
June 30, 2009. In May and June 2009, we entered into agreements with
the holders of the Series A, Series B, and Series C Preferred Stock to satisfy
the dividends in the aggregate of $382,000 due for the quarters ended December
31, 2008, March 31, 2009 and June 30, 2009 through the issuance of unregistered
shares of our common stock. As a result, we issued an aggregate of
1,441,610 shares of common stock to the holders of Preferred Stock in lieu of
paying the dividends in cash.
Our debt
agreements have covenants that define certain financial requirements and
operating restrictions. Our failure to comply with any covenant or
material obligation contained in these debt agreements, absent a waiver or
forbearance from the lenders, would result in an event of default which could
accelerate debt repayment terms under the debt agreements. Due to
cross-default provisions contained in our debt agreements, an event of default
under one agreement could accelerate repayment terms under the other agreements,
which would have a material adverse effect on our liquidity and capital
resources. At the date of this filing, we are in compliance with the
requirements of the applicable covenants required by our debt
agreements.
Cash
Flows
During
fiscal years 2009 and 2008, cash and cash equivalents increased $75,000 and
decreased $939,000, respectively.
We
generated cash from the following sources (in thousands):
|
|
Years Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Cash
provided by operating activities
|
|
$
|
12,067
|
|
|
$
|
-
|
|
Proceeds
from term loan and issuance of promissory notes
|
|
|
5,725
|
|
|
|
7,690
|
|
Proceeds
from issuance of preferred stock
|
|
|
149
|
|
|
|
516
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
-
|
|
|
|
1,170
|
|
Net
proceeds on line of credit payable
|
|
|
-
|
|
|
|
2,492
|
|
Decrease
in restricted cash
|
|
|
68
|
|
|
|
1,076
|
|
Proceeds
from sale of equipment
|
|
|
102
|
|
|
|
86
|
|
|
|
$
|
18,111
|
|
|
$
|
13,030
|
|
We used
cash primarily for (in thousands):
|
|
Years Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
payments on line of credit payable
|
|
$
|
11,944
|
|
|
$
|
-
|
|
Principal
payments on promissory notes
|
|
|
4,993
|
|
|
|
6,359
|
|
Cash
used in operations
|
|
|
-
|
|
|
|
4,243
|
|
Payment
of dividends
|
|
|
390
|
|
|
|
56
|
|
Purchases
of property and equipment
|
|
|
298
|
|
|
|
2,459
|
|
Payments
of debt and equity issuance costs
|
|
|
353
|
|
|
|
770
|
|
Capital
lease payments
|
|
|
58
|
|
|
|
82
|
|
|
|
$
|
18,036
|
|
|
$
|
13,969
|
|
|
|
|
|
|
|
|
|
|
Net
change in cash and cash equivalents
|
|
$
|
75
|
|
|
$
|
(939
|
)
|
As of
June 30, 2009, we had $7.8 million outstanding under our line of
credit. The amounts disclosed in the captions titled “Proceeds from
line of credit” and “Repayments of line of credit” in the accompanying
consolidated statements of cash flows for the year ended June 30, 2009 include
the cumulative activity of the daily borrowings and repayments, $210.3 million
and $222.3 million, respectively, under the line of credit. The
availability under the line of credit at June 30, 2009 amounted to $2.4
million. The net cash borrowings from, or repayments of, the line of
credit during the fiscal years ended June 30, 2009 and 2008, respectively, have
been included as sources or uses of cash in the tables above.
Adequacy
of Capital Resources
Our
liquidity and ability to meet financial obligations is dependent on, among other
things, the generation of cash flow from operating activities, obtaining or
maintaining sufficient trade credit from vendors, complying with our debt
covenants, continuing renewal of our line of credit facility, and/or raising any
required additional capital through the issuance of debt or equity securities or
additional borrowings.
Our
sources of cash during fiscal 2010 are expected to be cash on hand, cash
generated from operations, borrowings under our credit facility, and any other
capital sources that may be deemed necessary. There is no assurance,
however, that if additional capital is required, it will be available to us or
available on acceptable terms.
We
reacted quickly to the current economic crisis, which we recognized as
significantly impacting our business in November 2008, when we implemented an
extensive program of cost reductions and business restructuring steps to improve
margins in order to offset reductions in the volumes of fuel, lubricants,
chemicals and other products and services sold to our customers. Poor
economic conditions have significantly impacted the businesses of our customers,
as less freight is being transported and manufacturing demand is down,
correspondingly reducing the consumption of fuel and other petroleum
products. As a result, we have been concentrating our efforts on
reducing costs and conserving cash availability in order to meet the challenges
of a slowing economy. We have also sought to offset the reduced
demand from existing customers by aggressively seeking new customers, with some
success.
In order
to conserve cash during the deepening economic recession, in the third quarter
of fiscal 2009, we entered into a series of agreements with the holders of the
August 2007 and September 2008 Notes to defer to April 15, 2009, the $563,000 in
interest payments originally due in the third quarter of fiscal
2009. As consideration for the deferral of these interest payments
until April 15, 2009, we paid a deferral fee equal to 1% of the outstanding
principal balance, or $95,000 of which 50% of the deferral fee was paid in cash,
with the remainder satisfied through the issuance of 170,827 unregistered shares
of our common stock. For
purposes of determining the number of
shares to be issued for the stock portion of the deferral fee or upon conversion
of the Payment, shares were valued at $0.29 per share, the official closing
price on the Nasdaq Stock Market on January 22, 2009, the trading day
immediately preceding the effective date of the Agreements.
As a
result of the June 2009 Recapitalization described above, our total
debt was immediately reduced by $4.5 million and our cash
requirements for interest and dividends are expected to be reduced by over $1
million per year. Moreover, shareholders’ equity has been increased by more than
$4.1 million as a result of the Recapitalization.
Our uses
of cash over the next twelve months are expected to be principally for operating
working capital needs, maintaining our line of credit, servicing any principal
and interest on our debt and dividend requirements on our Series D Preferred
Stock. Our line of credit with our principal lender matures on June
30, 2012.
Off-Balance
Sheet Arrangements
At June
30, 2009, we do not have any material off-balance sheet
arrangements.
NEW ACCOUNTING STANDARDS AND
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Recent
Accounting Pronouncement
In
September 2006, the FASB issued FAS Statement No. 157, “
Fair Value Measurements
”
(“FAS No. 157”). This standard provides guidance for using fair value
to measure assets and liabilities. Under FAS No. 157, fair value
refers to the price that would be received to sell an asset or paid to transfer
a liability in an orderly transaction between market participants in the market
in which the reporting entity transacts. In this standard, the FASB
clarifies the principle that fair value should be based on the assumptions that
market participants would use when pricing the asset or liability. In
support of this principle, FAS No. 157 establishes a fair value hierarchy that
prioritizes the information used to develop those assumptions. The
fair value hierarchy gives the highest priority to quoted prices in active
markets and the lowest priority to unobservable data, for example, the reporting
entity’s own data. Under the standard, fair value measurements would
be separately disclosed by level within the fair value
hierarchy. Certain aspects of this standard were effective for the
financial statements issued for the Company since the beginning of fiscal year
2009. The adoption of FAS No. 157 had no impact on the Company’s
consolidated financial position, results of operations or cash
flows.
FASB Staff
Position (“FSP”) FAS 157-2, “Effective Date of FASB Statement No. 157,” issued
in February 2008, provides a one-year deferral to fiscal years beginning after
November 15, 2008 of the effective date of FAS No. 157 for nonfinancial assets
and nonfinancial liabilities, except those that are recognized or disclosed in
financial statements at least annually at fair value on a recurring
basis.
The Company’s adoption of
the
remaining provisions of FAS No. 157 are not expected to have an impact on the
Company’s consolidated financial position, results of operations or cash
flows.
In
February 2007, FAS Statement No. 159, “
The Fair Value Option for Financial
Assets and Financial Liabilities
” (“FAS No. 159”), was issued. FAS
No. 159 enables companies to report selected financial assets and liabilities at
their fair value. This statement requires companies to provide additional
information to help investors and other users of financial statements understand
the effects of a company’s election to use fair value on its earnings. FAS
No. 159 also requires companies to display the fair value of assets and
liabilities on the face of the balance sheet when a company elects to use fair
value. FAS No. 159 was effective for the Company since the beginning of
fiscal year 2009. The Company’s adoption of FAS No. 159 had no impact
on the Company’s financial condition or results of operations
because
the Company did not elect to record any financial assets or liabilities at fair
value.
In
December 2007, the FASB issued FAS Statement No. 141 (revised 2007), “
Business Combinations”
(“FAS
No. 141R”), which replaces FAS No. 141. The statement retains the
purchase method of accounting for acquisitions, but requires a number of
changes, including changes in the way assets and liabilities are recognized in
the purchase accounting. It also changes the recognition of assets
acquired and liabilities assumed arising from contingencies, requires the
capitalization of in-process research and development at fair value, and
requires the expensing of acquisition-related costs as incurred. In
April, 2009, the FASB issued FSP FAS 141(R)-1, “
Accounting for Assets Acquired and
Liabilities Assumed in a Business Combination That Arise from
Contingencies
” (“FSP No. 131(R)-1”). This FSP amends and
clarifies FAS No. 141R to address application issues raised by preparers,
auditors, and members of the legal profession on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. FAS
No. 141R is effective for the Company beginning July 1, 2009 and will
be applied prospectively to business combinations completed on or after that
date. The Company estimates that the adoption of FAS No. 141R will
result in a $187,000 expense in the first quarter of fiscal year 2010 due to the
write-off of the deferred acquisition costs balance as of June 30, 2009,
which are no longer capitalized under FAS No. 141R.
In
December 2007, the FASB issued FAS Statement No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51
,” which changes
the accounting and reporting for minority interests (“FAS No.
160”). Minority interests will be recharacterized as noncontrolling
interests and will be reported as a component of equity separate from the
parent’s equity, and purchases or sales of equity interests that do not result
in a change in control will be accounted for as equity
transactions. In addition, net income attributable to the
noncontrolling interest will be included in consolidated net income on the face
of the income statement and, upon a loss of control, the interest sold, as well
as any interest retained, will be recorded at fair value with any gain or loss
recognized in earnings. FAS No. 160 is effective for the Company
beginning July 1, 2009 and will apply prospectively, except for the
presentation and disclosure requirements, which will apply
retrospectively. The standard will have no impact on our financial
condition, results of operations or cash flows.
In March
2008, the FASB issued FAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FAS Statement No.
133
” (“FAS No. 161”). This Standard requires enhanced
disclosures regarding derivatives and hedging activities, including: (a) the
manner in which an entity uses derivative instruments; (b) the manner in which
derivative instruments and related hedged items are accounted for under FAS No.
133, “
Accounting for
Derivative Instruments and Hedging Activities”
; and (c) the effect of
derivative instruments and related hedged items on an entity’s financial
position, financial performance, and cash flows. FAS No. 161 is
effective for the Company beginning July 1, 2009. As FAS No. 161
relates specifically to disclosures, the standard will have no impact on our
financial condition, results of operations or cash flows.
In April
2008, the FASB issued FSP FAS No. 142-3, “
Determination of the Useful Life of
Intangible Assets
” (“FSP No. 142-3”). This standard amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is effective
for
the Company beginning July 1,2009.
Early adoption is prohibited. The
standard will have no impact on our financial condition, results of operations
or cash flows.
In May
2008, the FASB issued FSP APB 14-1, “
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)
” (“FSP No. 14-1”). This standard clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants. Additionally, this FSP specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP No. 14-1 is effective for
the Company beginning July 1,2009. The standard will have no impact
on our financial condition, results of operations or cash flows as our
historical convertible debt did not allow for settlement in cash.
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1
, “Interim Disclosures About Fair
Value of Financial Instruments”.
This FSP amends FAS No.
107, “
Disclosures about Fair
Value of Financial Instruments”,
to require disclosures about fair value
of financial instruments for interim reporting periods as well as in annual
financial statements, and also amends APB No. 28, “
Interim Financial Reporting”,
to require those disclosures in summarized financial information at
interim reporting periods. This FSP is effective for the Company beginning July
1, 2009. This FSP does not require disclosures for earlier periods
presented for comparative purposes at initial adoption. In periods after initial
adoption, this FSP requires comparative disclosures only for periods ending
after initial adoption. The adoption of this standard will have no
impact on our financial condition, results of operations or cash
flows.
In May
2009, the FASB issued FAS Statement No. 165, “
Subsequent Events
” (“FAS No.
165”), which provides guidance to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. FAS No. 165 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was
selected. FAS No. 165 is effective for interim and annual periods
ending after June 15, 2009, and accordingly, we adopted this Standard during the
fourth quarter of fiscal 2009. FAS No. 165 requires that public entities
evaluate subsequent events through the date that the financial statements are
issued. We have evaluated subsequent events through the time of the filing of
these financial statements with the SEC on September 28, 2009.
In
June 2009, the FASB issued FAS Statement No. 166, “
Accounting for Transfers of
Financial Assets, an amendment to SFAS No. 140”
(“FAS No. 166”). FAS
No. 166 eliminates the concept of a qualifying special-purpose entity, changes
the requirements for derecognizing financial assets including limiting the
circumstances in which a company can derecognize a portion of a financial asset,
and requires additional disclosures. FAS No. 166 is effective for financial
statements issued for fiscal years beginning after November 15, 2009, and
interim periods within those fiscal years. The Company has not
determined the impact, if any, on its financial statements of this accounting
standard.
In June
2009, the FASB issued FAS Statement No. 167, “
Amendments to FASB Interpretation
No. 46(R)”
(“FAS No. 167”). FAS No. 167 revises the approach to
determine when an entity that is insufficiently capitalized or not controlled
through voting rights (referred to as a variable interest entity or VIE) should
be consolidated. The new consolidation model for VIEs considers whether the
enterprise has the power to direct the activities that most significantly impact
the VIE’s economic performance and shares in the significant risks and rewards
of the entity. FAS No. 167 requires companies to continually reassess their
involvement with VIEs to determine if consolidation is appropriate and provide
additional disclosures about their involvement with them. FAS
No. 167 is effective for financial statements issued for fiscal years beginning
after November 15, 2009, and interim periods within those fiscal
years. The Company has not determined the impact, if any, on its
financial statements of this accounting standard.
In June
2009, the FASB issued FAS Statement No. 168, “
The FASB Accounting Standards
CodificationTM and the Hierarchy of Generally Accepted Accounting Principles - A
Replacement of FASB Statement No. 162”
(“FAS No. 168”). This
Statement establishes the Codification as the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under federal securities laws are also sources
of authoritative U.S. generally accepted accounting principles (GAAP) recognized
by the FASB to be applied by nongovernmental entities. On the
effective date of this Statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non authoritative. All guidance contained in the
Codification carries an equal level of authority. This Statement is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The standard will have no impact on our
financial condition, results of operations or cash flows.
Critical
Accounting Policies and Estimates
The
accompanying discussion and analysis of our financial condition and results of
operations are based upon our consolidated financial statements, which have been
prepared in accordance with generally accepted accounting principles in the
United States (U.S. GAAP). Note 2 to the Consolidated Financial
Statements describes the significant accounting policies and estimates used in
preparation of the Consolidated Financial Statements. Some of our
accounting policies require us to make difficult and subjective judgments, often
as a result of the need to make estimates of matters that are inherently
uncertain. We base our estimates and judgments on historical
experience and on various other assumptions that we believe are reasonable under
the circumstances; however, to the extent there are material differences between
these estimates, judgments or assumptions and our actual results, our financial
statements will be affected. There can be no assurance that actual
results will not differ from those estimates. We believe the
accounting policies discussed below reflect our most significant assumptions,
estimates and judgments and are the most critical to aid in fully understanding
and evaluating our reported financial results.
Accounts Receivable and Allowance for
Doubtful Accounts
We
perform ongoing credit evaluations of our customers and adjust credit limits
based upon payment history and the customers' current credit
worthiness. Management continuously monitors collections and payments
from customers and maintains a provision for estimated credit losses based upon
historical experience and any specific customer collection issues that are
identified. While such credit losses have historically been within
expectations and the provisions established, we cannot assure that we will
continue to experience the same credit loss rates that have occurred in the
past.
Inventory
Valuation Reserves
We make
estimates relating to the net realizable value of inventories, based upon our
assumptions about future demand, historical trends and market
conditions. If we estimate that the net realizable value of inventory
is less than the cost of the inventory recorded on our books, we record a
reserve for the difference between the cost of the inventory and the estimated
net realizable value. This reserve is recorded as a charge to cost of
sales.
Property
and Equipment
We record
property and equipment at cost and depreciate that cost over the estimated
useful life of the asset on a straight-line basis. Ordinary
maintenance and repairs are expensed as incurred and improvements that
significantly increase the useful life of property and equipment are
capitalized.
We test
property and equipment for impairment whenever events or changes in
circumstances indicate that the carrying value of an asset may not be
recoverable. The conditions that would trigger an impairment
assessment of property, plant and equipment would include, but not be limited
to, a significant, sustained negative trend in operating results or cash flows;
a decrease in demand for our services; a change in the competitive environment;
and other industry and economic factors. Recoverability of assets to
be held and used is measured by a comparison of the carrying amount of the asset
to future net cash flows expected to be generated by the asset. If
such assets are deemed to be impaired, the impairment to be recognized is
measured by the amount by which the carrying amount of the assets exceeds the
fair value of the assets based on the projected net cash flows discounted at a
rate commensurate with the risk of the assets.
Goodwill
and Other Intangible Assets
In
accordance with FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS No.
142”), goodwill and intangible assets with indefinite lives are not amortized
but instead are measured for impairment at least annually, or when events
indicate that an impairment exists. As required by FAS No. 142, in
our impairment test for goodwill, we compare the estimated fair value of
goodwill to the carrying value. If the carrying value exceeds our
estimate of fair value, we calculate impairment as the excess of the carrying
value over our estimate of fair value. Our estimates of fair
value utilized in goodwill tests may be based upon a number of factors,
including our assumptions about the expected future operating performance of our
reporting unit. Our estimates may change in future periods due to,
among other things, political and economic conditions and changes to our
business operations or inability to meet business plans. Such changes
may result in impairment charges recorded in future periods.
Intangible
assets that are determined to have finite lives are amortized over their useful
lives and are measured for impairment only when events or circumstances indicate
the carrying value may be impaired. In these cases, we estimate the
future undiscounted cash flows to be derived from the asset to determine whether
or not a potential impairment exists. If the carrying value exceeds
our estimate of future undiscounted cash flows, we then calculate the impairment
as the excess of the carrying value of the asset over our estimate of its fair
value.
Income
Taxes
The
provision for income taxes and corresponding balance sheet accounts are
determined in accordance with Financial Accounting Standard No. 109, “Accounting
for Income Taxes” (“SFAS No. 109”). Under SFAS No. 109, deferred tax
assets and liabilities are determined based on the temporary differences between
the bases of certain assets and liabilities for income tax and financial
reporting purposes. The deferred tax assets and liabilities are
classified according to the financial statement classification of the net assets
and liabilities generating the differences. The Company provides a
valuation allowance for that portion of deferred tax assets which it cannot
determine is more likely than not to be recognized.
As
required by the provisions of Financial Accounting Standards (“FAS”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(“FIN No. 48”), which
clarifies FAS No. 109, “Accounting for Income Taxes”, the Company recognizes the
financial statement benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the position following
an audit. For tax positions meeting the more likely than not
threshold, the amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of being realized upon
ultimate settlement with the relevant tax authority.
At June 30, 2009 and 2008,
the amount of unrecognized tax benefits was approximately $759,000 and
$777,000
respectively,
of which approximately $326,000 and $360,000 would, if recognized, affect the
Company’s effective tax rate for each respective tax
year.
To the
extent a valuation allowance is established or an increase in the allowance is
recorded in a period, a tax expense is provided in the statement of
operations. Management judgment is required in determining the
provision for income taxes, the deferred tax assets and liabilities and any
valuation allowance recorded against net deferred tax assets. A
valuation allowance of $10.3 million was recorded as of June 30, 2009, due to
uncertainties related to utilizing some of the deferred tax assets, primarily
consisting of certain net operating losses carried forward, before they
expire. The valuation allowance is based on estimates of taxable
income and the period over which deferred tax assets will be
recoverable. In the event that actual results differ from these
estimates, or these estimates are adjusted in future periods, it may be
necessary to establish an additional valuation allowance that could materially
impact the Company’s financial position and results of operations.
Item
8. Financial Statements and Supplementary Data
Our
financial statements required by Form 10-K are attached following Part III of
this report, commencing on page F-1.
Item
9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
Item
9(T). Controls and Procedures
Evaluation
of disclosure controls and procedures.
We
carried out an evaluation, under the supervision and with the participation of
our management, including the Chief Executive Officer and the Chief
Financial Officer of the effectiveness of the design and operation of our
disclosure controls and procedures as defined in the Exchange Act
Rules 13a-15(e) and 15d-15(e), as of the end of the period covered by this
Annual Report on Form 10-K. Based upon this evaluation, the Chief
Executive Officer and the Chief Financial Officer concluded that the Company’s
disclosure controls and procedures were effective as of June 30,
2009.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal
control over financial reporting as that term is defined In Exchange Act Rule
13a-15(f). Our internal control over financial reporting is a process
designed to provide reasonable assurance regarding the reliability of our
financial reporting and the preparation of our financial statements for external
purposes in accordance with U.S. generally accepted accounting
principles. Our control environment is the foundation for our system
of internal control over financial reporting. Internal control over
financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly
reflect our transactions and dispositions of our assets; (ii) provide reasonable
assurance that transactions are recorded as necessary to permit preparation of
our financial statements in accordance with generally accepted accounting
principles, and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors; and (iii)
provide reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that could have a
material effect on our financial statements.
Management assessed the effectiveness
of the Company’s internal control over financial reporting as of June 30,
2009. In making this assessment, management used the criteria set
forth by the Committee of Sponsoring Organizations of the Treadway Commission
(COSO) in Internal Control-Integrated framework. Based on our
assessment, management has concluded that our internal control over financial
reporting was effective as of June 30, 2009 to provide reasonable assurance
regarding the reliability of financial reporting and the preparation of
financial statements for external reporting purposes in accordance with U.S.
generally accepted accounting principles.
This annual report does not include an
attestation report of the Company’s independent registered public accounting
firm regarding internal control over financial
reporting. Management’s report was not subject to attestation by the
Company’s independent registered public accounting firm pursuant to rules of the
SEC that permit the Company to provide only management’s report in this annual
report.
Changes
in Internal Control Over Financial Reporting
No change
in our internal control over financial reporting (as defined in Rules 13a-15(f)
and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended
June 30, 2009 that has materially affected, or is reasonably likely to
materially affect, our internal control over financial reporting.
Inherent
Limitations on Effectiveness of Controls
Due to
its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements. In addition, projections of any
evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate because of changes in conditions or that the
degree of compliance with the policies or procedures may
deteriorate.
A control
system, no matter how well designed and operated, can provide only reasonable,
not absolute, assurance that the control system’s objectives will be
met. The design of a control system must reflect the fact that there
are resource constraints, and the benefits of controls must be considered
relative to their costs. Furthermore, due to the inherent limitations
in all control systems, no evaluation of controls can provide absolute assurance
that misstatements due to error or fraud will not occur or that all control
issues and instances of fraud, if any, within the Company have been
detected. These inherent limitations include the realities that
judgments in decision-making can be faulty and that breakdowns can occur because
of a simple error or mistake. Controls can also be circumvented by
the individual acts of some persons, by collusion of two or more people, or by
management override of the controls. The design of any system of
controls is based in part on certain assumptions about the likelihood of future
events, and there can be no assurance that any system’s design will succeed in
achieving its stated goals under all potential future conditions.
Item
9B. Other Information
None
PART
III
Item
10. Directors, Executive Officers, and Corporate
Governance
The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2009 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.
Item
11. Executive Compensation
The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2009 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.
Item
12. Security Ownership of Certain Beneficial Owners and Management
and Related Stockholder Matters
The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2009 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.
Item
13. Certain Relationships, Related Transactions, and Director
Independence
The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2009 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.
Item
14. Principal Accounting Fees and Services
The
information required by this item is incorporated by reference from our
Definitive Proxy Statement in connection with our 2009 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this
report.
PART
IV
Item
15. Exhibits and Financial Statement Schedules
(a)
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Financial
Statements and Schedule
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Our
financial statements are attached following Part III of this report, commencing
on page F-1. Financial statement schedules have been omitted since they
are not required, not applicable, or the information is otherwise
included.
(b)
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Exhibits
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Exhibits
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Description
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2.1
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Asset
Purchase Agreement by and among SMF Energy Corporation., SMF Services,
Inc., Shank C&E Investments, L.L.C., Jerry C. Shanklin and Claudette
Shanklin dated January 25, 2005 filed as Exhibit 2.1 to the Company’s Form
8-K filed January 31, 2005 and incorporated by reference
herein.
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2.2
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Supplemental
Agreement dated February 18, 2005 to the Asset Purchase Agreement by and
among SMF Energy Corporation., SMF Services, Inc., Shank C&E
Investments, L.L.C., Jerry C. Shanklin and Claudette Shanklin dated
January 25, 2005 filed as Exhibit 2.1 to the Company’s Form 8-K filed
February 25, 2005 and incorporated by reference herein.
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2.3
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Stock
Purchase Agreement by and among SMF Energy Corporation, H & W
Petroleum Co., Inc., Eugene Wayne Wetzel, Mary Kay Wetzel, Sharon
Harkrider, William M. Harkrider II, W. M. Harkrider Testamentary Trust,
Harkrider Distributing Company, Inc. and W & H Interests dated
September 7, 2005 filed as Exhibit 2.1 to the Company’s Form 8-K filed
September 8, 2005 and incorporated by reference herein.
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2.4
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Agreement
of Merger and Plan of Merger and Reorganization between Streicher Mobile
Fueling, Inc. and SMF Energy Corporation dated February 13,
2007. Filed as Exhibit 2.1 to the Company’s Form 8-K filed
February 14, 2007 and incorporated by reference herein.
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3.1
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Restated
Articles of Incorporation filed as Exhibit 3.1 to the Company’s Form 10-K
for the fiscal year ended June 30, 2003 and incorporated by reference
herein.
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3.2
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Amended
and Restated Bylaws filed as Exhibit 3.2 to the Company’s Form
10-Q for the quarter ended December 31, 2003 and incorporated by reference
herein.
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3.3
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Certificate
of Incorporation of SMF Energy Corporation and Certificate of Amendment of
Certificate of Incorporation of SMF Energy Corporation (incorporated by
reference to Appendix B to the Company’s Definitive Proxy Statement on
Schedule 14A, filed on October 30, 2006).
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3.4
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Bylaws
of SMF Energy Corporation (incorporated by reference to Appendix D to the
Company’s Definitive Proxy Statement on Schedule 14A, filed on October 30,
2006).
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3.5
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Certificate
of Designation of Series A Convertible Preferred Stock. Filed
as Exhibit 3.1 to the Company’s Form 8-K filed March 6, 2008 and
incorporated by reference
herein.
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3.6
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Certificate
of Designation of Series B Convertible Preferred Stock. Filed
as Exhibit 3.1 to the Company’s Form 8-K filed March 14, 2008 and
incorporated by reference herein.
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3.7
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Certificate
of Designation of Series C Convertible Preferred Stock. Filed
as Exhibit 3.1 to the Company’s Form 8-K filed August 21, 2008 and
incorporated by reference herein.
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3.8
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Certificate
of Designation of Series D Convertible Preferred Stock. Filed
as Exhibit 3.1 to the Company’s Form 8-K filed July 6, 2009 and
incorporated by reference herein.
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3.9
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Certificate
of Amendment of Certificate of Incorporation of SMF Energy
Corporation. Filed as Exhibit 3.1 to the Company’s Form 8-K
filed September 15, 2009 and incorporated by reference
herein.
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4.1
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Form
of Common Stock Certificate filed as Exhibit 4.1 to the Company’s
Registration Statement on Form SB-2 (No. 333-11541) and incorporated by
reference herein.
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4.2
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Form
of Redeemable Common Stock Purchase Warrant filed as Exhibit 4.2 to the
Company’s Registration Statement on Form SB-2 (No. 333-11541) and
incorporated by reference herein.
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4.3
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Underwriters’
Purchase Option Agreement between the Company and Argent Securities, Inc.
filed as Exhibit 4.3 to the Company’s Registration Statement on Form SB-2
(No. 333-11541) and incorporated by reference herein.
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4.4
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Warrant
Agreement between the Company and American Stock Transfer & Trust
Company filed as Exhibit 4.4 to the Company’s Registration Statement on
Form SB-2 (No. 333-11541) and incorporated by reference
herein.
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4.5
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Indenture
with The Bank of Cherry Creek dated August 29, 2003 filed as Exhibit 10.14
to the Company’s Form 10-K for the fiscal year ended June 30, 2003 and
incorporated by reference herein.
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4.6
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Form
of 10% Promissory Note dated January 25, 2005 filed as Exhibit 10.2 to the
Company’s Form 8-K filed January 31, 2005 and incorporated by reference
herein.
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4.7
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Form
of Investor Warrant dated January 25, 2005 filed as Exhibit 10.3 to the
Company’s Form 8-K filed January 31, 2005 and incorporated by reference
herein.
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4.8
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Indenture
Agreement with American National Bank dated January 25, 2005 filed as
Exhibit 10.4 to the Company’s Form 8-K filed January 31, 2005 and
incorporated by reference herein.
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4.9
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Form
of Placement Agent Warrants dated January 25, 2005 filed as Exhibit 10.5
to the Company’s Form 8-K filed January 31, 2005 and incorporated by
reference herein.
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4.10
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Form
of Note for Stock Purchase Agreement in Exhibit 2.3 herein filed as
Exhibit 10.1 to the Company’s Form 8-K filed September 8, 2005 and
incorporated by reference herein.
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4.11
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Form
of 10% Promissory Note filed as Exhibit 10.3 to the Company’s Form 8-K
filed September 8, 2005 and incorporated by reference
herein.
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4.12
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Form
of Investor Warrant filed as Exhibit 10.4 to the Company’s Form 8-K filed
September 8, 2005 and incorporated by reference
herein.
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4.13
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Form
of Indenture Agreement filed as Exhibit 10.5 to the Company’s Form 8-K
filed September 8, 2005 and incorporated by reference
herein.
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4.14
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Form
of Warrant. Filed as Exhibit 10.1 to the Company’s Form 8-K filed February
22, 2007 and incorporated by reference herein.
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4.15
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Form
of 11% Senior Secured Convertible Promissory Note dated August 8, 2007.
Filed as Exhibit 10.2 to the Company’s Form 8-K filed August 14, 2007 and
incorporated by reference herein.
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4.16
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Form
of Indenture dated August 8, 2007. Filed as Exhibit 10.3 to the Company’s
Form 8-K filed August 14, 2007 and incorporated by reference
herein.
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4.17
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Form
of Warrant dated August 8, 2007. Filed as Exhibit 10.5 to the Company’s
Form 8-K filed August 14, 2007 and incorporated by reference
herein.
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4.18
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Final
form of 11% Senior Secured Convertible Promissory Note dated August 8,
2007. Filed as Exhibit 4.18 to the Company’s Form 10-K for the fiscal year
ended June 30, 2007 and incorporated by reference
herein.
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4.19
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Form
of Promissory Note dated November 19, 2007. Filed as Exhibit 4.1 to the
Company’s Form 8-K filed November 23, 2007 and incorporated by reference
herein.
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4.20
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Form
of Allonge – Amendment to Promissory Note dated November 19, 2007. Filed
as Exhibit 10.2 to the Company’s Form 10-Q for the quarter ended December
31, 2007 filed February 14, 2008 and incorporated by reference
herein.
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4.21
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Form
of 12% Unsecured Convertible Promissory Note dated September 2, 2008.
Filed as Exhibit 4.1 to the Company’s Form 8-K filed September 8, 2008 and
incorporated by reference herein.
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4.22
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Form of Convertible Promissory
Note filed as Exhibit 4.1 to the Company's Form 8-K filed on July 6, 2009
and incorporated by reference herein.
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10.1
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Registrant’s
1996 Stock Option Plan filed as Exhibit 10.2 to the Company’s Registration
Statement on Form SB-2 (No. 333-1154) and incorporated by reference
herein.
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10.2
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2000
Stock Option Plan filed as Exhibit 10.6 to the Company’s Form 10-K for the
fiscal year ended January 31, 2001 and incorporated by reference
herein.
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10.5
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2001
Directors Stock Option Plan filed as Appendix A to the Company’s Proxy
Statement for the Annual Meeting of Stockholders on December 9, 2004 and
incorporated by reference herein.
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10.6
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Loan
and Security Agreement with Congress Financial Corporation dated September
26, 2002 filed as Exhibit 99.1 to the Company’s Form 8-K filed September
30, 2002 and incorporated by reference herein.
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10.7
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First
Amendment to Loan and Security Agreement with Congress Financial
Corporation dated March 31, 2003 filed as Exhibit 10.13 to the Company’s
Form 10-K for the fiscal year ended June 30, 2003 and incorporated by
reference
herein.
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10.8
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Security
Agreement with The Bank of Cherry Creek dated August 29, 2003 filed as
Exhibit 10.14 to the Company’s Form 10-K for the fiscal year ended June
30, 2003 and incorporated by reference herein.
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10.9
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Second
Amendment to Loan and Security Agreement with Congress Financial
Corporation dated August 29, 2003 filed as Exhibit 10.1 to the Company’s
Form 10-Q for the quarter ended September 30, 2003 and incorporated by
reference herein.
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10.10
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Third
Amendment to Loan and Security Agreement with Congress Financial
Corporation dated August 3, 2003 filed as Exhibit 10.1 to the Company’s
Form 10-Q for the quarter ended December 31, 2004 and incorporated by
reference herein.
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10.11
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Form
of Securities Purchase Agreement dated January 25, 2005 filed as Exhibit
10.1 to the Company’s Form 8-K filed January 31, 2005 and incorporated by
reference herein.
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10.12
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Fourth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, SMF Services, Inc. and Wachovia Bank, National Association,
successor by merger to Congress Financial Corporation (Florida) dated
February 18, 2005 filed as Exhibit 10.1 to the Company’s Form 8-K filed
February 25, 2005 and incorporated by reference herein.
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10.13
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Subordination
Agreement by, between and among Shank C&E Investments, L.L.C.,
Wachovia Bank, National Association, successor by merger to Congress
Financial Corporation (Florida), SMF Services, Inc. and SMF Energy
Corporation dated February 18, 2005 filed as Exhibit 10.2 to the Company’s
Form 8-K filed February 25, 2005 and incorporated by reference
herein.
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10.14
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Amended
and Restated Employment Agreement by and between SMF Energy Corporation
and Richard E. Gathright executed May 14, 2005, effective as of March 1,
2005 filed as Exhibit 10.1 to the Company’s Form 10-Q for the quarter
ended March 31, 2005, and incorporated by reference
herein.
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10.15
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Form
of Note Purchase Agreement filed as Exhibit 10.2 to the Company’s Form 8-K
filed September 8, 2005 and incorporated by reference
herein.
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10.16
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Form
of Security Agreement filed as Exhibit 10.6 to the Company’s Form 8-K
filed September 8, 2005 and incorporated by reference
herein.
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10.17
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Fifth
Amendment to Loan and Security Agreement by among SMF Energy Corporation,
SMF Services, Inc. and Wachovia Bank, National Association, successor by
merger to Congress Financial Corporation (Florida) dated October 1,
2005. Filed as Exhibit 10.1 to the Company’s Form 8-K filed October
6, 2005 and incorporated by reference herein.
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10.18
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Subordination
Agreement executed effective as of the 1st day of October, 2005, by,
between and among Eugene Wayne Wetzel, Mary Kay Wetzel, Sharon Harkrider,
William M. Harkrider II, W. M. Harkrider Testamentary Trust, Harkrider
Distributing Company, Inc. and W & H Interests, Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (FLORIDA), and SMF Energy Corporation Filed as Exhibit
10.2 to the Company’s Form 8-K filed October 6, 2005 and incorporated by
reference
herein.
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10.19
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Warrant
Purchase Agreement dated June 30, 2006. Filed as Exhibit 10.1 to the
Company’s Form 8-K filed July 7, 2006 and incorporated by reference
herein.
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10.20
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Form
of Stock Purchase Warrant. Filed as Exhibit 10.2 to the Company’s
Form 8-K filed July 7, 2006 and incorporated by reference
herein.
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10.21
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Sixth
Amendment to Loan and Security Agreement by among SMF Energy Corporation,
SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) dated September 22, 2006 and effective March 31,
2006. Filed as Exhibit 10.1 to the Company’s Form 8-K filed October
2, 2006 and incorporated by reference herein.
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10.22
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Seventh
Amendment to Loan and Security Agreement by among SMF Energy Corporation,
SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) effective September 22, 2006. Filed as Exhibit
10.2 to the Company’s Form 8-K filed October 2, 2006 and incorporated by
reference herein.
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10.23
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Amendment
to Warrant Purchase Agreement and Stock Purchase Warrant between Streicher
Mobile Fueling, Inc. and the Purchasers dated September 28, 2006.
Filed as Exhibit 10.1 to the Company’s Form 8-K filed October 3, 2006 and
incorporated by reference herein.
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10.24
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Second
Amendment to Warrant Purchase Agreement and Stock Purchase Warrant between
Streicher Mobile Fueling, Inc. and the Purchasers dated November 29,
2006. Filed as Exhibit 10.1 to the Company’s Form 8-K filed December
4, 2006 and incorporated by reference herein.
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10.25
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Third
Amendment to Warrant Purchase Agreement and Stock Purchase Warrant between
Streicher Mobile Fueling, Inc. and the Purchasers dated January 14,
2007. Filed as Exhibit 10.1 to the Company’s Form 8-K filed January
19, 2007 and incorporated by reference herein.
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10.26
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Assumption
Agreement and Eighth Amendment to Loan and Security Agreement by and among
SMF Energy Corporation, successor by merger to Streicher Mobile Fueling,
Inc., SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia
Bank, National Association, successor by merger to Congress Financial
Corporation (Florida) dated February 14, 2007. Filed as Exhibit 10.1
to the Company’s Form 8-K filed February 21, 2007 and incorporated by
reference herein.
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10.27
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Ninth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) dated February 15, 2007. Filed as Exhibit 10.2
to the Company’s Form 8-K filed February 21, 2007 and incorporated by
reference herein.
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10.28
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Fourth
Amendment to Warrant Purchase Agreement and Stock Purchase Warrant between
SMF Energy Corporation, Triage Capital Management, L.P. and Triage Capital
Management B L.P. dated February 14, 2007. Filed as Exhibit 10.3 to
the Company’s Form 8-K filed February 21, 2007 and incorporated by
reference
herein.
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10.29
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Form
of Securities Purchase Agreement. Filed as Exhibit 10.2 to the
Company’s Form 8-K filed February 22, 2007 and incorporated by reference
herein.
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10.30
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Fifth
Amendment to Warrant Purchase Agreement and Stock Purchase Warrant between
SMF Energy Corporation, Triage Capital Management, L.P. and Triage Capital
Management B L.P. dated March 29, 2007. Filed as Exhibit 10.1 to the
Company’s Form 8-K filed April 3, 2007 and incorporated by reference
herein.
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10.31
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Tenth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) dated August 8, 2007. Filed as Exhibit 10.1 to
the Company’s Form 8-K filed August 14, 2007 and incorporated by reference
herein.
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10.32
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Form
of Security Agreement, dated August 8, 2007. Filed as Exhibit 10.4
to the Company’s Form 8-K filed August 14, 2007 and incorporated by
reference herein.
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10.33
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Form
of Note Purchase Agreement dated August 8, 2007. Filed as Exhibit
10.33 to the Company’s Form 10-K for the fiscal year ended June 30, 2007
and incorporated by reference herein.
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10.34
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Form
of Securities Purchase Agreement dated August 8, 2007. Filed as
Exhibit 10.34 to the Company’s Form 10-K for the fiscal year ended June
30, 2007 and incorporated by reference herein.
|
|
|
|
|
|
10.35
|
|
Subordination
Agreement dated July 13, 2007. Filed as Exhibit 10.33 to the
Company’s Form 10-K for the fiscal year ended June 30, 2007 and
incorporated by reference herein.
|
|
|
|
|
|
10.36
|
|
Eleventh
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) dated October 31, 2007. Filed as Exhibit 10.1
to the Company’s Form 8-K filed November 2, 2007 and incorporated by
reference herein.
|
|
|
|
|
|
10.37
|
|
Form
of Subordination Agreement dated November 19, 2007. Filed as Exhibit
10.1 to the Company’s Form 8-K filed November 23, 2007 and incorporated by
reference herein.
|
|
|
|
|
|
10.38
|
|
Form
of Subordination Agreement dated November 19, 2007. Filed as Exhibit
10.2 to the Company’s Form 8-K filed November 23, 2007 and incorporated by
reference herein.
|
|
|
|
|
|
10.39
|
|
Twelfth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) dated November 21, 2007. Filed as Exhibit 10.3
to the Company’s Form 8-K filed November 23, 2007 and incorporated by
reference
herein.
|
|
10.40
|
|
Thirteenth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) dated February 8, 2008. Filed as Exhibit 10.1
to the Company’s Form 8-K filed February 14, 2008 and incorporated by
reference herein.
|
|
|
|
|
|
10.41
|
|
Fourteenth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) dated March 6, 2008. Filed as Exhibit 10.1 to
the Company’s Form 8-K filed March 6, 2008 and incorporated by reference
herein.
|
|
|
|
|
|
10.42
|
|
Form
of Exchange Agreement. Filed as Exhibit 10.2 to the Company’s Form
8-K filed March 6, 2008 and incorporated by reference
herein.
|
|
|
|
|
|
10.43
|
|
Form
of Securities Purchase Agreement. Filed as Exhibit 10.3 to the
Company’s Form 8-K filed March 6, 2008 and incorporated by reference
herein.
|
|
|
|
|
|
10.44
|
|
Fifteenth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) dated March 10, 2008. Filed as Exhibit 10.1 to
the Company’s Form 8-K filed March 14, 2008 and incorporated by reference
herein.
|
|
|
|
|
|
10.45
|
|
Form
of Exchange Agreement. Filed as Exhibit 10.2 to the Company’s Form
8-K filed March 14, 2008 and incorporated by reference
herein.
|
|
|
|
|
|
10.46
|
|
Form
of Securities Purchase Agreement. Filed as Exhibit 10.1 to the
Company’s Form 8-K filed August 21, 2008 and incorporated by reference
herein.
|
|
|
|
|
|
10.47
|
|
Sixteenth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor by merger to Streicher Mobile Fueling, Inc., SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida) dated September 2, 2008. Filed as Exhibit 10.1
to the Company’s Form 8-K filed September 8, 2008 and incorporated by
reference herein.
|
|
|
|
|
|
10.48
|
|
Seventeenth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor by merger to Streicher Mobile Fueling, Inc. SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor by merger to Congress Financial
Corporation (Florida), dated September 17, 2008.
|
|
|
|
|
|
10.49
|
|
Form
of Subordination Agreement. Filed as Exhibit 10.2 to the Company’s
Form 8-K filed September 8, 2008 and incorporated by reference
herein.
|
|
|
|
|
|
10.50
|
|
Form
of Securities Purchase Agreement. Filed as Exhibit 10.3 to the
Company’s Form 8-K filed September 8, 2008 and incorporated by reference
herein.
|
|
10.51
|
|
SMF
Energy Corporation 2001 Director Stock Option Plan (incorporated by
reference to Appendix B to the Company’s Definitive Proxy Statement on
Schedule 14A, filed on September 24, 2008).
|
|
|
|
|
|
10.52
|
|
SMF
Energy Corporation 2000 Stock Option Plan (incorporated by reference to
Appendix C to the Company’s Definitive Proxy Statement on Schedule 14A,
filed on September 24, 2008).
|
|
|
|
|
|
10.53
|
|
Form
of Interest Deferral Agreement. Filed as Exhibit 10.1 to the Company’s
Form 8-K filed on February 9, 2009 and incorporated by reference
herein.
|
|
|
|
|
|
10.54
|
|
Form
of Payment in Kind Agreement. Filed as Exhibit 10.1 to the Company’s Form
8-K filed on May 8, 2009 and incorporated by reference
herein.
|
|
|
|
|
|
10.55
|
|
Eighteenth
Amendment to Loan and Security Agreement by and among SMF Energy
Corporation, successor-by-merger to Streicher Mobile Fueling, Inc., SMF
Services, Inc., H & W Petroleum Company, Inc. and Wachovia Bank,
National Association, successor-by-merger to Congress Financial
Corporation (Florida) dated June 29, 2009. Filed as Exhibit 10.1 to the
Company’s Form 8-K filed on July 6, 2009 and incorporated by reference
herein.
|
|
|
|
|
|
10.56
|
|
Form
of Debt Subordination Agreement. Filed as Exhibit 10.2 to the Company’s
Form 8-K filed on July 6, 2009 and incorporated by reference
herein.
|
|
|
|
|
|
10.57
|
|
Form
of Exchange Agreement (Series A for Common Stock). Filed as Exhibit 10.3
to the Company’s Form 8-K filed on July 6, 2009 and incorporated by
reference herein.
|
|
|
|
|
|
10.58
|
|
Form
of Exchange Agreement (Series B for Common Stock). Filed as Exhibit 10.4
to the Company’s Form 8-K filed on July 6, 2009 and incorporated by
reference herein.
|
|
|
|
|
|
10.59
|
|
Form
of Exchange Agreement (Series C for Common Stock). Filed as Exhibit 10.5
to the Company’s Form 8-K filed on July 6, 2009 and incorporated by
reference herein.
|
|
|
|
|
|
10.60
|
|
Form
of Exchange Agreement (Unsecured Note for Common Stock). Filed as Exhibit
10.6 to the Company’s Form 8-K filed on July 6, 2009 and incorporated by
reference herein.
|
|
|
|
|
|
10.61
|
|
Form
of Payment and Exchange Agreement (Unsecured Note for Cash and Series D
Preferred). Filed as Exhibit 10.7 to the Company’s Form 8-K filed on July
6, 2009 and incorporated by reference herein.
|
|
|
|
|
|
10.62
|
|
Form
of Payment and Exchange Agreement (Secured Note for Cash and Common
Stock). Filed as Exhibit 10.8 to the Company’s Form 8-K filed on July 6,
2009 and incorporated by reference herein.
|
|
|
|
|
|
10.63
|
|
Form
of Payment and Exchange Agreement (Secured Note for Cash and Common
Stock). Filed as Exhibit 10.9 to the Company’s Form 8-K filed on July 6,
2009 and incorporated by reference herein.
|
|
|
|
|
|
10.64
|
|
Form
of Payment and Exchange Agreement (Secured Note for Cash, Series D
Preferred
and Common Stock). Filed as Exhibit 10.10 to the Company’s Form 8-K filed
on July 6, 2009 and incorporated by reference herein.
|
|
|
|
|
|
10.65
|
|
Form
of Payment and Exchange Agreement (Secured Note for Cash and New
Unsecured
Note). Filed as Exhibit 10.11 to the Company’s Form 8-K filed on July 6,
2009 and incorporated by reference
herein.
|
|
*21.1
|
|
Subsidiaries
of the Company
|
|
|
|
|
|
*23.1
|
|
Consent
of Grant Thornton LLP
|
|
|
|
|
|
*31.1
|
|
Certificate
of Principal Executive Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
*31.2
|
|
Certificate
of Principal Financial Officer pursuant to Section 302 of the
Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
*32.1
|
|
Certificate
of Principal Executive Officer and Principal Financial Officer pursuant to
Section 906 of The Sarbanes-Oxley Act of 2002
|
|
|
|
|
|
*99.1
|
|
Statement
of Financial Accounting Standards No. 84 “Induced Conversions of
Convertible Debt (as amended)”
|
|
|
|
|
|
*99.2
|
|
Emerging
Issues Task Force D-42 “The Effect on the Calculation of Earnings per
Share for the Redemption or Induced Conversion of Preferred
Stock”
|
|
|
|
|
|
*Filed
herewith
|
SIGNATURES
Pursuant
to the requirement of Section 13 or 15(d) of the Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized.
Dated:
September 28, 2009
|
SMF
ENERGY CORPORATION
|
|
|
|
|
By:
|
/s/ Richard E. Gathright
|
|
|
Richard
E. Gathright, Chief Executive Officer and
President
|
Pursuant
to the requirements of the Exchange Act, this report has been signed below by
the following persons on behalf of the registrant and in the capacities and on
the dates indicated.
Name
|
|
Title
|
|
Date
|
|
|
|
|
|
|
By:
|
/s/ Richard E. Gathright
|
|
Chairman
of the Board, Chief Executive
|
|
September
28, 2009
|
|
Richard
E. Gathright
|
|
Officer
and President (Principal
Executive
Officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/ Michael S. Shore
|
|
Chief
Financial Officer, Treasurer and
|
|
September
28, 2009
|
|
Michael
S. Shore
|
|
Senior
Vice President (Principal
Financial
Officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/ Laura Patricia
Messenbaugh
|
|
Chief
Accounting Officer and Vice
|
|
September
28, 2009
|
|
Laura
Patricia Messenbaugh
|
|
President
(Principal Accounting Officer)
|
|
|
|
|
|
|
|
|
By:
|
/s/ Wendell R. Beard
|
|
Director
|
|
September
28, 2009
|
|
Wendell
R. Beard
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Steven R. Goldberg
|
|
Director
|
|
September
28, 2009
|
|
Steven
R. Goldberg
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Nat Moore
|
|
Director
|
|
September
28, 2009
|
|
Nat
Moore
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Larry S. Mulkey
|
|
Director
|
|
September
28, 2009
|
|
Larry
S. Mulkey
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ C. Rodney O’Connor
|
|
Director
|
|
September
28, 2009
|
|
C.
Rodney O’Connor
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/ Robert S. Picow
|
|
Director
|
|
September
28, 2009
|
|
Robert
S. Picow
|
|
|
|
|
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Page
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-2
|
|
|
Consolidated
Balance Sheets as of June 30, 2009 and 2008
|
F-3
|
|
|
Consolidated
Statements of Operations for the Years Ended June 30, 2009 and
2008
|
F-4
|
|
|
Consolidated
Statements of Shareholders’ Equity for the Years Ended June 30, 2009 and
2008
|
F-5
|
|
|
Consolidated
Statements of Cash Flows for the Years Ended June 30, 2009 and
2008
|
F-7
|
|
|
Notes
to Consolidated Financial Statements
|
F-9
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
Board of
Directors and
Shareholders
of SMF Energy Corporation
We have
audited the accompanying consolidated balance sheets of SMF Energy Corporation
(Delaware Corporation) and subsidiaries as of June 30, 2009 and 2008, and the
related consolidated statements of operations, shareholders’ equity, and cash
flows for each of the years then ended. These consolidated financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these consolidated financial
statements based on our audits.
We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that
we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. The Company is not
required to have, nor were we engaged to perform an audit of its internal
control over financial reporting. Our audits included consideration of
internal control over financial reporting as a basis for designing audit
procedures that are appropriate in the circumstances, but not for the purpose of
expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion.
An audit also includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, as well as
evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.
In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of SMF Energy Corporation and
subsidiaries as of June 30, 2009 and 2008, and the results of their operations
and their cash flows for each of the years then ended in conformity with
accounting principles generally accepted in the United States of
America.
/s/ Grant
Thornton LLP
Fort
Lauderdale, Florida
September
28, 2009
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
(in
000’s, except share and per share data)
|
|
June 30, 2009
|
|
|
June 30, 2008
|
|
ASSETS
|
|
|
|
|
|
|
Current
assets:
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
123
|
|
|
$
|
48
|
|
Accounts
receivable, net of allowances for doubtful accounts
|
|
|
15,878
|
|
|
|
30,169
|
|
Inventories,
net of reserves
|
|
|
1,959
|
|
|
|
2,535
|
|
Prepaid
expenses and other current assets
|
|
|
772
|
|
|
|
855
|
|
Total
current assets
|
|
|
18,732
|
|
|
|
33,607
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net of accumulated depreciation
|
|
|
8,569
|
|
|
|
10,276
|
|
Identifiable
intangible assets, net of accumulated amortization
|
|
|
2,019
|
|
|
|
2,392
|
|
Goodwill
|
|
|
228
|
|
|
|
228
|
|
Deferred
debt costs, net of accumulated amortization
|
|
|
503
|
|
|
|
348
|
|
Other
assets
|
|
|
67
|
|
|
|
133
|
|
Total
assets
|
|
$
|
30,118
|
|
|
$
|
46,984
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Current
liabilities:
|
|
|
|
|
|
|
|
|
Line
of credit payable
|
|
$
|
7,845
|
|
|
$
|
19,789
|
|
Current
portion of term loan
|
|
|
917
|
|
|
|
-
|
|
Accounts
payable
|
|
|
5,807
|
|
|
|
9,921
|
|
Accrued
expenses and other liabilities
|
|
|
3,767
|
|
|
|
4,938
|
|
Total
current liabilities
|
|
|
18,336
|
|
|
|
34,648
|
|
Long-term
liabilities:
|
|
|
|
|
|
|
|
|
Promissory
notes, net of unamortized debt discount
|
|
|
800
|
|
|
|
8,794
|
|
Term
loan, net of current portion
|
|
|
4,083
|
|
|
|
-
|
|
Other
long-term liabilities
|
|
|
370
|
|
|
|
490
|
|
Total
liabilities
|
|
|
23,589
|
|
|
|
43,932
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders’
equity:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.01 par value; 10,000 Series A shares
|
|
|
|
|
|
|
|
|
authorized,
0 and 4,587 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Preferred
stock, $0.01 par value; 2,000 Series B shares
|
|
|
|
|
|
|
|
|
authorized,
0 and 1,985 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Preferred
stock, $0.01 par value; 2,000 Series C shares
|
|
|
|
|
|
|
|
|
authorized,
0 issued and outstanding
|
|
|
-
|
|
|
|
-
|
|
Preferred
stock, $0.01 par value; 5,000 Series D shares
|
|
|
|
|
|
|
|
|
authorized,
3,228 and 0 issued and outstanding, respectively
|
|
|
-
|
|
|
|
-
|
|
Common
stock, $.01 par value; 50,000,000 shares authorized;
|
|
|
|
|
|
|
|
|
35,825,488
and 14,556,295 issued and
|
|
|
|
|
|
|
|
|
outstanding,
respectively
|
|
|
358
|
|
|
|
146
|
|
Additional
paid-in capital
|
|
|
36,323
|
|
|
|
30,719
|
|
Accumulated
deficit
|
|
|
(30,152
|
)
|
|
|
(27,813
|
)
|
Total
shareholders’ equity
|
|
|
6,529
|
|
|
|
3,052
|
|
Total
liabilities and shareholders’ equity
|
|
$
|
30,118
|
|
|
$
|
46,984
|
|
The accompanying notes to consolidated
financial statements are an integral part of these consolidated balance
sheets.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF OPERATIONS
(in
000’s, except per share data)
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Petroleum
product sales and service revenues
|
|
$
|
177,054
|
|
|
$
|
235,215
|
|
Petroleum
product taxes
|
|
|
22,195
|
|
|
|
25,474
|
|
Total
revenues
|
|
|
199,249
|
|
|
|
260,689
|
|
|
|
|
|
|
|
|
|
|
Cost
of petroleum product sales and service
|
|
|
160,614
|
|
|
|
222,303
|
|
Petroleum
product taxes
|
|
|
22,195
|
|
|
|
25,474
|
|
Total
cost of sales
|
|
|
182,809
|
|
|
|
247,777
|
|
|
|
|
|
|
|
|
|
|
Gross
profit
|
|
|
16,440
|
|
|
|
12,912
|
|
|
|
|
|
|
|
|
|
|
Selling,
general and administrative expenses
|
|
|
14,755
|
|
|
|
14,881
|
|
|
|
|
|
|
|
|
|
|
Operating
income (loss)
|
|
|
1,685
|
|
|
|
(1,969
|
)
|
|
|
|
|
|
|
|
|
|
Interest
expense
|
|
|
(2,483
|
)
|
|
|
(3,060
|
)
|
Interest
and other income
|
|
|
115
|
|
|
|
9
|
|
Non-cash
FAS 84 inducement on extinguishment of convertible
notes
|
|
|
(1,651
|
)
|
|
|
-
|
|
Gain/(loss)
on extinguishment of promissory notes
|
|
|
27
|
|
|
|
(1,749
|
)
|
|
|
|
|
|
|
|
|
|
Loss
before income taxes
|
|
|
(2,307
|
)
|
|
|
(6,769
|
)
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
(32
|
)
|
|
|
-
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
|
$
|
(6,769
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share computation:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
|
$
|
(6,769
|
)
|
Less:
Preferred stock dividends
|
|
|
(577
|
)
|
|
|
(249
|
)
|
Less:
Non-cash deemed dividends for preferred stock
|
|
|
|
|
|
|
|
|
Series
A, B and C conversion to common stock
|
|
|
(1,746
|
)
|
|
|
-
|
|
Net
loss attributable to common shareholders
|
|
$
|
(4,662
|
)
|
|
$
|
(7,018
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted net loss per share
|
|
|
|
|
|
|
|
|
attributable
to common shareholders
|
|
$
|
(0.31
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
Basic
and diluted weighted average common
|
|
|
|
|
|
|
|
|
shares
outstanding
|
|
|
15,097
|
|
|
|
14,467
|
|
The
accompanying notes to consolidated financial statements are an integral part of
these consolidated statements of operations.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in 000’s
except share data)
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
Series
B
|
|
|
Series
C
|
|
|
Series
D
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
<
/fo
nt>
|
|
|
Amount
<
/fo
nt>
|
|
|
Shares
<
/fo
nt>
|
|
|
Amount
<
/fo
nt>
|
|
|
Shares
<
/fo
nt>
|
|
|
Amount
<
/fo
nt>
|
|
|
Shares
<
/fo
nt>
|
|
|
Amount
<
/fo
nt>
|
|
|
Shares
<
/fo
nt>
|
|
|
Amount
<
/fo
nt>
|
|
|
Capital
<
;/f
ont>
|
|
|
Deficit
<
;/f
ont>
|
|
|
Total
</
fon
t>
|
|
Balance
at June 30, 2007
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
13,702,426
|
|
|
$
|
137
|
|
|
$
|
$ 25,021
|
|
|
$
|
(21,044
|
)
|
|
$
|
4,114
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(6,769
|
)
|
|
|
(6,769
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of commons stock and warrants from August 2007 offering, net of
issuance costs of $123
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
853,869
|
|
|
|
9
|
|
|
|
1,234
|
|
|
|
-
|
|
|
|
1,243
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series A preferred stock, net of issuance costs of
$56
|
|
|
4,587
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2,467
|
|
|
|
-
|
|
|
|
2,467
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series B preferred stock, net of issuance costs of
$44
|
|
|
-
|
|
|
|
-
|
|
|
|
1,985
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,742
|
|
|
|
-
|
|
|
|
1,742
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(152
|
)
|
|
|
-
|
|
|
|
(152
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
-
|
|
|
|
(97
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
504
|
|
|
|
-
|
|
|
|
504
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2008
|
|
|
4,587
|
|
|
$
|
-
|
|
|
|
1,985
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
14,556,295
|
|
|
$
|
146
|
|
|
$
|
30,719
|
|
|
$
|
(27,813
|
)
|
|
$
|
3,052
|
|
The
accompanying notes to consolidated financial statements are an integral part of
these consolidated statements of shareholders’ equity.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
(in
000’s except share data)
(Continued)
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
Preferred
Stock
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
Series
A
|
|
|
Series
B
|
|
|
Series
C
|
|
|
Series
D
|
|
|
Common
Stock
|
|
|
Paid-in
|
|
|
Accumulated
|
|
|
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Total
|
|
Balance
at June 30, 2008
|
|
|
4,587
|
|
|
$
|
-
|
|
|
|
1,985
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
14,556,295
|
|
|
$
|
146
|
|
|
$
|
30,719
|
|
|
$
|
(27,813
|
)
|
|
$
|
3,052
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,339
|
)
|
|
|
(2,339
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series C preferred stock, net of issuance costs of
$39
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
229
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
110
|
|
|
|
-
|
|
|
|
110
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Series A preferred stock to common stock
|
|
|
(473
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
473,000
|
|
|
|
4
|
|
|
|
(4
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for payment of interest deferral fee and accrued
interest on August 2007 Notes and September 2008
Notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,463,266
|
|
|
|
15
|
|
|
|
512
|
|
|
|
-
|
|
|
|
527
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of Series D Preferred Stock for partial extinguishment of August 2007
Notes and September 2008 Notes, net of issuance costs of
$43
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
3,228
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,146
|
|
|
|
-
|
|
|
|
1,146
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for partial extinguishment of August 2007
Notes, September 2008 Notes, Preferred Stock A, Preferred
Stock B, and Preferred Stock C, net of issuance costs of
$224
|
|
|
(4,114
|
)
|
|
|
-
|
|
|
|
(1,985
|
)
|
|
|
-
|
|
|
|
(229
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
17,628,161
|
|
|
|
176
|
|
|
|
2,035
|
|
|
|
-
|
|
|
|
2,211
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-cash
FAS 84 inducement of extinguishment of promissory
notes
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,651
|
|
|
|
-
|
|
|
|
1,651
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for agent fees
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
263,156
|
|
|
|
3
|
|
|
|
94
|
|
|
|
-
|
|
|
|
97
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for payment of accrued dividend on preferred stock,
net of issuance costs of $21
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,441,610
|
|
|
|
14
|
|
|
|
345
|
|
|
|
-
|
|
|
|
359
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(318
|
)
|
|
|
-
|
|
|
|
(318
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
B preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(242
|
)
|
|
|
-
|
|
|
|
(242
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
C preferred stock dividend
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
-
|
|
|
|
(17
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock-based
compensation expense
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
292
|
|
|
|
-
|
|
|
|
292
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance
at June 30, 2009
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
3,228
|
|
|
$
|
-
|
|
|
|
35,825,488
|
|
|
$
|
358
|
|
|
$
|
36,323
|
|
|
$
|
(30,152
|
)
|
|
$
|
6,529
|
|
The
accompanying notes to consolidated financial statements are an integral part of
these consolidated statements of shareholders’ equity.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
000’s)
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
|
$
|
(6,769
|
)
|
Adjustments
to reconcile net loss to net cash provided by (used in)
|
|
|
|
|
|
|
|
|
operating
activities:
|
|
|
|
|
|
|
|
|
Depreciation
and amortization:
|
|
|
|
|
|
|
|
|
Cost
of sales
|
|
|
1,077
|
|
|
|
1,442
|
|
Selling,
general and administrative
|
|
|
1,361
|
|
|
|
1,254
|
|
Amortization
of deferred debt costs
|
|
|
305
|
|
|
|
318
|
|
Amortization
of debt discount
|
|
|
42
|
|
|
|
81
|
|
Amortization
of stock-based compensation
|
|
|
292
|
|
|
|
504
|
|
Gain
from sale of assets
|
|
|
(93
|
)
|
|
|
(70
|
)
|
Inventory
reserve
|
|
|
(17
|
)
|
|
|
(139
|
)
|
Provision
for doubtful accounts
|
|
|
366
|
|
|
|
198
|
|
Non-cash
FAS 84 inducement on extinguishment of convertible
notes
|
|
|
1,651
|
|
|
|
-
|
|
Non-cash
interest expense deferral fee
|
|
|
48
|
|
|
|
-
|
|
Non-cash
(gain) loss on extinguishment of promissory notes
|
|
|
(27
|
)
|
|
|
1,479
|
|
Other
|
|
|
(13
|
)
|
|
|
-
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Decrease
(increase) in accounts receivable
|
|
|
13,935
|
|
|
|
(4,925
|
)
|
Decrease
(increase) in inventories, prepaid expenses and other
assets
|
|
|
675
|
|
|
|
(501
|
)
|
(Decrease)
increase in accounts payable and other liabilities
|
|
|
(5,196
|
)
|
|
|
2,885
|
|
Net
cash provided by (used in) operating activities
|
|
|
12,067
|
|
|
|
(4,243
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Purchases
of property and equipment
|
|
|
(298
|
)
|
|
|
(2,459
|
)
|
Proceeds
from sale of equipment
|
|
|
102
|
|
|
|
86
|
|
Decrease
in restricted cash
|
|
|
68
|
|
|
|
1,076
|
|
Net
cash used in investing activities
|
|
|
(128
|
)
|
|
|
(1,297
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from line of credit
|
|
|
210,313
|
|
|
|
263,676
|
|
Repayments
of line of credit
|
|
|
(222,257
|
)
|
|
|
(261,184
|
)
|
Proceeds
from issuance of term and promissory notes
|
|
|
5,725
|
|
|
|
7,690
|
|
Proceeds
from issuance of common stock and warrants
|
|
|
-
|
|
|
|
1,170
|
|
Proceeds
from issuance of preferred stock
|
|
|
149
|
|
|
|
516
|
|
Principal
payments on promissory notes
|
|
|
(4,993
|
)
|
|
|
(6,359
|
)
|
Debt
issuance costs
|
|
|
(186
|
)
|
|
|
(568
|
)
|
Common
stock, preferred stock, and warrants issuance costs
|
|
|
(167
|
)
|
|
|
(202
|
)
|
Payment
of preferred stock dividends
|
|
|
(390
|
)
|
|
|
(56
|
)
|
Capital
lease payments
|
|
|
(58
|
)
|
|
|
(82
|
)
|
Net
cash (used in) provided by financing activities
|
|
|
(11,864
|
)
|
|
|
4,601
|
|
|
|
|
|
|
|
|
|
|
NET
INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
|
|
|
75
|
|
|
|
(939
|
)
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, beginning of period
|
|
|
48
|
|
|
|
987
|
|
|
|
|
|
|
|
|
|
|
CASH
AND CASH EQUIVALENTS, end of period
|
|
$
|
123
|
|
|
$
|
48
|
|
The accompanying notes to consolidated
financial statements are an integral part of these consolidated statements of
cash flows.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
(in
000’s)
(Continued)
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
SUPPLEMENTAL
DISCLOSURE OF CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
2,125
|
|
|
$
|
2,871
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
DISCLOSURE OF NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
- Issuance of common stock in exchange for Preferred
|
|
|
|
|
|
|
|
|
Stock
A, Preferred Stock B, and Preferred Stock C
|
|
$
|
4,198
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
- Issuance of common stock as part of the extinguishment
of
|
|
|
|
|
|
|
|
|
August
2007 Notes and September 2008 Notes
|
|
$
|
2,435
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
- Issuance of preferred stock as part of the extinguishment
of
|
|
|
|
|
|
|
|
|
August
2007 Notes and September 2008 Notes
|
|
$
|
1,189
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
- Issuance of June 2009 Note as part of the extinguishment
of
|
|
|
|
|
|
|
|
|
August
2007 Notes
|
|
$
|
800
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for payment of accrued dividends on Preferred Stock
A,
|
|
|
|
|
|
|
|
|
Preferred
Stock B, and Preferred Stock C
|
|
$
|
380
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
- Issuance of common stock for agent fees
|
|
$
|
97
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Recapitalization
- Issuance of common stock for accrued interest on
|
|
|
|
|
|
|
|
|
August
2007 Notes and September 2008 Notes
|
|
$
|
478
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for the deferral fee related to the August 2007
Notes
and
September 2008 Notes, January 1, 2009 and March 1, 2009
accrued
interest,
respectively, which were deferred until April 15, 2009
|
|
$
|
49
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Conversion
of Preferred Stock A to common shares
|
|
$
|
260
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Capital
leases
|
|
$
|
54
|
|
|
$
|
143
|
|
|
|
|
|
|
|
|
|
|
Accrued
debt costs related to the term loan and line of credit
|
|
$
|
352
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Accrued
costs related to issuance of stock, warrants and promissory
notes
|
|
$
|
104
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Refinancing
of August 2003 Notes, January 2005 Notes, and September
2005
|
|
|
|
|
|
|
|
|
Notes
into August 2007 Notes
|
|
$
|
-
|
|
|
$
|
4,918
|
|
|
|
|
|
|
|
|
|
|
Non-cash
costs related to issuance of stock, warrants and August 2007
Notes
|
|
$
|
-
|
|
|
$
|
134
|
|
|
|
|
|
|
|
|
|
|
Debt
discount costs related to issuance of stock, warrants,
extensions
|
|
|
|
|
|
|
|
|
of
warrants and August 2007 Notes
|
|
$
|
-
|
|
|
$
|
112
|
|
|
|
|
|
|
|
|
|
|
Conversion
of promissory notes and accrued interest to preferred
stock
|
|
$
|
-
|
|
|
$
|
3,793
|
|
|
|
|
|
|
|
|
|
|
Accrued
dividends related to preferred stock
|
|
$
|
-
|
|
|
$
|
193
|
|
The
accompanying notes to consolidated financial statements are an integral part of
these consolidated statements of cash flows.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
SMF
Energy Corporation (the “Company”) is a Delaware corporation formed in
2006. In December 2006, the shareholders of Streicher Mobile Fueling, Inc.
(“Streicher”), a Florida corporation formed in 1996, approved changing
Streicher’s name to SMF Energy Corporation and the reincorporation of Streicher
in Delaware by merger into the Company. The merger was effective February
14, 2007.
The
Company provides petroleum product distribution services, transportation
logistics and emergency response services to the trucking, manufacturing,
construction, shipping, utility, energy, chemical, telecommunications, and
government services industries. The Company generates its revenues from
commercial mobile and bulk fueling; the packaging, distribution and sale of
lubricants; integrated out-sourced fuel management; transportation logistics,
and emergency response services. The Company’s fleet of custom specialized
tank wagons, tractor-trailer transports, box trucks and customized flatbed
vehicles delivers diesel fuel and gasoline to customers’ locations on a
regularly scheduled or as needed basis, refueling vehicles and equipment,
re-supplying fixed-site and temporary bulk storage tanks, and emergency power
generation systems; and distributes a wide variety of specialized petroleum
products, lubricants and chemicals to its customers.
At June
30, 2009, the Company was conducting operations through 31 service locations in
the eleven states of Alabama, California, Florida, Georgia, Louisiana,
Mississippi, Nevada, North Carolina, South Carolina, Tennessee and
Texas.
2.
|
SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
|
The
consolidated financial statements include the accounts of SMF Energy Corporation
and its wholly owned subsidiaries, SMF Services, Inc., H & W Petroleum
Company, Inc. (“H&W”) and Streicher Realty, Inc. All significant
intercompany balances and transactions have been eliminated in
consolidation.
Segment
Information
The
Company follows Statement of Financial Accounting Standards No. 131, “
Disclosures about Segments of an
Enterprise and Related Information
” (“FAS No. 131”), to report financial
and descriptive information about its reportable operating segments.
Operating segments are components of an enterprise for which separate financial
information is available and is evaluated regularly by the chief operating
decision maker in deciding how to allocate resources and in assessing
performance. The Company’s chief operating decision maker currently
evaluates the Company’s operations from a number of different operational
perspectives including but not limited to geographic location. Although
the Company records revenue by type of service, management does not assign
and/or allocate specific resources and assets to these services. The
Company’s assets are used interchangeably for the different types of services;
as a result, earnings information related to each type of service is
limited.
Reports
reviewed by management based on geographic location are prepared for ease of
review. However, these geographic areas have similar economic
characteristics in regards to the nature of the products and services, nature of
processes, type of customers, methods used to distribute the products, and the
nature of the regulatory environment. As a result, many business decisions
are based on consolidated metrics such as total gallons sold, net margin per
total gallons sold, gross margin per total gallons sold, and other consolidated
results. Due to the nature of the business, at June 30, 2009 and 2008, the
Company had only one reportable segment of business: distribution of petroleum
products from integrated out-sourced management services. Nevertheless,
management evaluates, at least quarterly, whether the Company continues to have
one single reportable segment.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Cash
and Cash Equivalents
During
fiscal year 2009, the Company paid down $11.9 million on its line of credit
payable. Total cash and cash availability was $2.5 million and $1.9
million at June 30, 2009 and 2008, respectively, and was approximately $2.5
million on September 23, 2009. Total cash and cash availability includes
cash and cash equivalents as presented in the Company’s balance sheet and cash
available to the Company through its line of credit, described in Note 5 – Line
of Credit Payable.
The
Company considers all highly liquid investments purchased with an original
maturity of three months or less to be cash equivalents. The Company
maintains its cash balances at financial institutions, which at times may exceed
federally insured limits. The Federal Deposit Insurance Corporation
currently insures balances up to $250,000. The Company has not experienced
any losses in such bank accounts.
Accounts
receivable mainly consist of amounts due from customers within a diverse range
of industries and are generally unsecured. The carrying amount of accounts
receivable is reduced by an allowance for doubtful accounts that reflects
management’s best estimate of the amounts that will not be collected. The
Company provides for credit losses based on management’s evaluation of
collectability including current and historical performance, credit worthiness
and experience of each customer. Uncollectible accounts receivables are
written off when a settlement is reached for an amount less than the outstanding
balance or when the Company determines that the balance will not be
collected.
Activity
in the allowance for doubtful accounts for the indicated periods is as follows
(in thousands):
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Balance
- beginning of period
|
|
$
|
1,283
|
|
|
$
|
1,401
|
|
Provision
for doubtful accounts
|
|
|
366
|
|
|
|
198
|
|
Write-offs,
net of recoveries
|
|
|
(611
|
)
|
|
|
(316
|
)
|
|
|
|
|
|
|
|
|
|
Balance
- end of period
|
|
$
|
1,038
|
|
|
$
|
1,283
|
|
Inventories,
consisting primarily of lubricants, chemicals, diesel fuel and gasoline, are
stated at the lower of cost or market and include federal and state petroleum
product taxes payable to vendors. Cost is determined using the first-in,
first-out method. Inventories of $2.0 million and $2.5 million at June 30,
2009 and 2008, respectively, are net of reserves for slow moving inventory of
$82,000 and $99,000, respectively.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Property
and equipment are stated at cost less accumulated depreciation. Ordinary
maintenance, repairs and replacement parts are expensed as incurred.
Improvements that significantly increase the value or useful life of property
and equipment are capitalized. Property and equipment are depreciated
using the straight-line method over the estimated useful lives of the
assets. Leasehold improvements are depreciated over the lesser of the
useful life of the assets or the lease term using the straight-line
method. Depreciation expense for property and equipment and leasehold
improvements was $2.1 million and $2.3 million, for the years ended June 30,
2009 and 2008, respectively.
Property
and equipment balances and the estimated useful lives were as follows at the
indicated dates (in thousands):
|
|
June 30,
|
|
|
|
|
|
|
2009
|
|
|
2008
|
|
|
Estimated Useful Life
|
|
|
|
|
|
|
|
|
|
|
|
Fuel
trucks, tanks and vehicles
|
|
$
|
17,430
|
|
|
$
|
18,126
|
|
|
5 –
25 years
|
|
Machinery,
equipment and software
|
|
|
1,589
|
|
|
|
1,488
|
|
|
3 –
5 years
|
|
Furniture
and fixtures
|
|
|
596
|
|
|
|
596
|
|
|
5 –
10 years
|
|
Leasehold
improvements
|
|
|
477
|
|
|
|
459
|
|
|
Lesser
of lease term or useful life
|
|
Software
development / ERP
|
|
|
3,690
|
|
|
|
3,521
|
|
|
5
years
|
|
Land
|
|
|
67
|
|
|
|
67
|
|
|
—
|
|
|
|
|
23,849
|
|
|
|
24,257
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Less:
Accumulated depreciation
|
|
|
(15,280
|
)
|
|
|
(
13
,981
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
$
|
8,569
|
|
|
$
|
10,276
|
|
|
|
|
In
accordance with AICPA Statement of Position 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use,” the Company
capitalized certain costs used in the development of internal use software,
which consisted primarily of the Company’s Enterprise Resource Planning (“ERP”)
operating system. These costs include external software and consulting
costs that were incurred as a result of the costs associated with the
implementation, coding and software configuration. At June 30, 2009 and
2008, the capitalized costs related to internal use software were $3.7 million
and $3.5 million, respectively. During fiscal years 2009 and 2008, the Company
capitalized $170,000 and $1.1 million, respectively. The Company did not
capitalize any interest associated with the software development as the amounts
were immaterial.
The
provision for income taxes and corresponding balance sheet accounts are
determined in accordance with Statement of Financial Accounting Standards No.
109, “Accounting for Income Taxes” (“FAS No. 109”). Under FAS No. 109,
deferred tax assets and liabilities are determined based on the temporary
differences between the bases of certain assets and liabilities for income tax
and financial reporting purposes. The deferred tax assets and liabilities
are classified according to the financial statement classification of the net
assets and liabilities generating the differences. The Company provides a
valuation allowance for the portion of deferred tax assets, which it cannot
determine is more likely than not to be recognized.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
As
required by the provisions of Financial Accounting Standards Board (“FAS”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(“FIN No. 48”), which
clarifies FAS No. 109, “Accounting for Income Taxes”, the Company recognizes the
financial statement benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the position following
an audit. For tax positions meeting the more likely than not threshold,
the amount recognized in the financial statements is the largest benefit that
has a greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority.
At
June 30, 2009 and 2008, the amount of unrecognized tax benefits was
approximately $759,000 and $777,000 respectively, of which approximately
$326,000 and $360,000 would, if recognized, affect the Company’s effective tax
rate for each respective tax year.
The
Company recognizes accrued interest and penalties related to unrecognized tax
benefits in income taxes. No interest and penalties have been accrued due
to the existence of net operating loss carryforward benefits that would exceed
any interest and penalties expense related to uncertain tax
positions.
The
Company or its subsidiaries file income tax returns in the U.S. federal
jurisdiction and various states and other local jurisdictions.
The
Company recognizes revenues at the time that its petroleum and other products
and services are delivered, and the customer takes ownership and assumes risk of
loss, provided that collections are reasonably assured at the time.
If the
Company bears the risk of loss, the Company accounts for petroleum product taxes
collected from its customers that are assessed from government authorities, on a
gross basis, in accordance with Emerging Issues Task Force Issue No. 06-03
(“EITF Issue No. 06-03”), “How Taxes Collected from Customers and Remitted to
Governmental Authorities Should be Presented in the Income Statement (“That Is,
Gross Versus Net Presentation”).
The
preparation of the Consolidated Financial Statements in conformity with
accounting principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect amounts
reported in the financial statements and accompanying notes. These
assumptions, if not realized, could affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenue and expenses during
the reporting period. Actual results could differ from management’s
estimates.
Fair
Value of Financial Instruments
The
Company’s financial instruments, primarily consisting of cash and cash
equivalents, restricted cash, accounts receivable and accounts payable
approximate fair value due to the short term maturity of these
instruments. The line of credit payable, promissory notes and
long-term debt approximate fair value because they were recorded at fair value
on June 29, 2009 when the Recapitalization occurred.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Deferred
Debt Costs and Debt Discount
The
Company amortizes its deferred debt costs and debt discount as interest expense
under the effective interest method over the respective term of the debt
issued. Activity related to the deferred debt costs and debt discount were
as follows (in thousands):
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Deferred Debt Costs
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
net - beginning of period
|
|
$
|
348
|
|
|
$
|
521
|
|
Amortization
|
|
|
(305
|
)
|
|
|
(318
|
)
|
Write
off of debt costs related to the conversion of debt
|
|
|
(118
|
)
|
|
|
(536
|
)
|
Additional
debt costs incurred during the year
|
|
|
578
|
|
|
|
681
|
|
|
|
|
|
|
|
|
|
|
Balance,
net - end of period
|
|
$
|
503
|
|
|
$
|
348
|
|
|
|
|
|
|
|
|
|
|
Debt Discount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance,
net - beginning of period
|
|
$
|
65
|
|
|
$
|
1,027
|
|
Amortization
|
|
|
(42
|
)
|
|
|
(81
|
)
|
Write
off of debt discount related to the conversion of debt
|
|
|
(23
|
)
|
|
|
(993
|
)
|
Valuation
of warrants issued and beneficial conversion feature
|
|
|
-
|
|
|
|
112
|
|
|
|
|
|
|
|
|
|
|
Balance,
net - end of period
|
|
$
|
-
|
|
|
$
|
65
|
|
During
the fiscal year ended June 30, 2008, the August 2003, January 2005 and September
2005 senior promissory notes were satisfied, and as a result, the Company wrote
off $443,000 of unamortized debt discounts and $978,000 of unamortized debt
costs as losses on extinguishment of promissory notes. In addition, during
the fiscal year ended June 30, 2008, the November 2007 and a portion of the
August 2007 Notes were exchanged into Series A and Series B Preferred Stock; as
a result, the Company wrote off $93,000 of unamortized debt costs and $15,000 of
unamortized debt discounts as additional losses on extinguishment of promissory
notes. See Note 7 – Long Term Debt -
Gain/(Loss) on Extinguishment of
Promissory Notes, net
.
On June
29, 2009, the Company engaged in a series of transactions that restructured all
of the Company’s debt and equity (the “Recapitalization”), including the
satisfaction of all of the outstanding August 2007 senior secured convertible
subordinated promissory notes and September 2008 unsecured promissory
notes. As a result, in June 2009, the Company wrote off $118,000 of
unamortized debt costs and $23,000 of unamortized debt discount as losses on
extinguishment of promissory notes. See Note 7 – Long Term Debt -
Gain/(Loss) on Extinguishment of
Promissory Notes, net.
Net
Income (Loss) Per Share
Basic net
income (loss) per share is computed by dividing the net income (loss)
attributable to common shareholders by the weighted average number of common
shares outstanding during each year.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Diluted
earnings per share is computed by dividing net earnings attributable to common
shareholders by the weighted-average number of common shares outstanding,
increased to include the number of additional common shares that would have been
outstanding if the dilutive potential common shares had been issued.
Conversion or exercise of the potential common shares is not reflected in
diluted earnings unless the effect is dilutive. In determining whether
outstanding common share equivalents should be considered for their dilutive
effect, the average market price of the Common Stock for the period has to
exceed the exercise price of the outstanding common share equivalent. The
dilutive effect, if any, of outstanding common share equivalents would be
reflected in diluted earnings per share by application of the if-converted and
the treasury stock method, as applicable. The Company excluded the impact
of all of its common stock equivalents in the computation of dilutive net loss
per share for the fiscal years ended June 30, 2009 and 2008, as their effect is
not dilutive.
Common
stock equivalents outstanding consisted of (in thousands):
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Stock
options
|
|
|
1,896
|
|
|
|
1,997
|
|
Common
stock warrants
|
|
|
710
|
|
|
|
887
|
|
Promissory
note conversion rights
|
|
|
400
|
|
|
|
3,034
|
|
Preferred
stock conversion rights
|
|
|
3,228
|
|
|
|
6,572
|
|
Total
common stock equivalents outstanding
|
|
|
6,234
|
|
|
|
12,490
|
|
The
following table sets forth the computation of basic and diluted loss per share
(in thousands, except per share amounts):
|
|
Years Ended
|
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(2,339
|
)
|
|
$
|
(6,769
|
)
|
Less:
Preferred stock dividends
|
|
|
(577
|
)
|
|
|
(249
|
)
|
Less:
Non-cash deemed dividends for the conversion
|
|
|
|
|
|
|
|
|
of
preferred stock Series A, B and C to common stock
|
|
|
(1,746
|
)
|
|
|
-
|
|
Net
loss attributable to common shareholders
|
|
$
|
(4,662
|
)
|
|
$
|
(7,018
|
)
|
|
|
|
|
|
|
|
|
|
Net
loss per share attributable to common
|
|
|
|
|
|
|
|
|
shareholders
– basic and diluted
|
|
$
|
(0.31
|
)
|
|
$
|
(0.49
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average shares outstanding:
|
|
|
|
|
|
|
|
|
Basic
and diluted
|
|
|
15,097
|
|
|
|
14,467
|
|
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
As a
result of the Recapitalization, the Company redeemed all the outstanding Series
A, Series B, and Series C preferred shares through the issuance of an aggregate
of 11,047,504 common shares at the negotiated price of $0.38 per share, which
was a per share amount lower than the original terms of the securities
issuable. As per EITF No. D-42, “The Effect on the Calculation of Earnings
per Share for the Redemption or Induced Conversion of Preferred Stock,” the
Company reported the fair value of the additional securities issued to the
preferred shareholders as a non-cash deemed dividend of $1.75
million, which was a calculation of the difference between the 6,328,000
common shares that would have been issuable under the original conversion rights
that existed in the convertible preferred shares and the 11,047,504 common
shares issued at $0.38 cents upon the conversion times the market price on the
conversion date. See Note 4 – Recapitalization.
See Note 15 – Subsequent Events, for information on the reverse
stock split.
Non-Cash FAS
84 Inducement on Convertible Notes
Also in
the Recapitalization, the Company extinguished a portion of the August 2007 and
the September 2008 Notes (“the Notes”) through the issuance of 5,330,658 shares
and 1,249,999 shares of Common Stock, respectively, at the negotiated price of
$0.38 per share, which was higher than the $0.37 per share closing bid price on
the trading day immediately preceding the June 29, 2009 Recapitalization.
The original terms of the Notes allowed for a conversion of 50% of the August
2007 Notes and 100% of the September 2008 Notes into common stock. The
negotiated issuance price of $0.38 per share in the Recapitalization was based
on then current market prices, and it was lower than the original conversion
prices of $1.46 per share and $0.65 per share of the August 2007 Notes and the
September 2008 Notes, respectively. Since the extinguishment of the Notes
through issuance of Common Stock was done at close to current market prices of
the Common Stock, the Company issued an aggregate of 4,462,456 more shares than
it would have issued for the convertible equivalent under the original terms of
the Notes.
Statement
of Financial Accounting Standards No. 84, “Induced Conversion of Convertible
Debt (as amended)” (“FAS No. 84”), specifies the method of accounting for
conversions of convertible debt to equity securities when the debtor induces
conversion of the debt by offering additional securities or other consideration
to convertible debt holders. In accordance with FAS No. 84, an
expense is recognized if and to the extent that “additional consideration is
paid to debt holders for the purpose of inducing prompt conversion of the debt
to equity securities (sometimes referred to as a convertible debt
‘sweetener’).” While the Company’s purpose in effecting the June 2009
Recapitalization was to effect a complete restructuring of its debt and equity
structure via a series of transactions that would have the effect of reducing
its outstanding debt and future obligations and there was no intent to induce
any conversion of the outstanding debt to common stock, a portion of the
exchange of the outstanding carrying value of $9.6 million in convertible debt
for an equal aggregate value of cash, common stock and preferred stock is
required by FAS No. 84 to be accounted for as an induced conversion of
outstanding debt securities. While we believe that the application of FAS
No. 84 does not reflect the economic substance of the value exchanged in this
portion of the Recapitalization transaction, we have reported the required
non-cash charge of approximately $1.65 million for the difference between
the number of common shares issued compared to the number of common shares that
would have been issued under the original terms of the convertible debt
instrument, times the market price on the conversion date.
The
Company understands that the accounting interpretation of FAS No. 84 is that an
inducement occurs any time additional shares are issued in the extinguishment of
convertible debt regardless of the absence of an economic loss or intent of the
parties to the transaction. As a result, the application of FAS No. 84 to
the exchange of existing convertible debt securities for common stock resulted
in the recording of a non-cash “inducement” accounting charge of $1.65
million, which was a calculation of the difference between the 2,118,201
common shares that would have been issuable to the applicable note holders under
the original conversion rights that existed in the convertible Notes and the
6,580,657 common shares exchanged at $0.38 cents upon the extinguishment.
The shares amounts include the impact of the July 6, 2009 transaction as
describe in Note 15 – Subsequent Events. This non-cash charge is deemed a
financing expense to extinguish the Notes and it is included in the Consolidated
Statements of Operations with a corresponding increase in Additional paid-in
capital and therefore the net impact has no effect on total Shareholder’s
Equity.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Impairment
or Disposal of Long-Lived Assets
In
accordance with the provisions of Statement of Financial Accounting Standards
(“FAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived
Assets” (“FAS No. 144”), the Company reviews long-lived assets for impairment
whenever events or changes in circumstances indicate that the carrying amount of
an asset may not be recoverable. Recoverability of assets to be held and
used is measured by a comparison of the carrying amount of an asset to
forecasted future undiscounted cash flows expected to be generated by the
asset. If the carrying amount of an asset exceeds its estimated future
cash flows, an impairment charge would be recognized by the amount that the
carrying amount of the asset exceeds the fair value of the asset based on the
projected net cash flows discounted at a rate commensurate with the risk of the
asset. Assets to be disposed of are reported at the lower of their
carrying amount or fair value less costs to sell. During the fiscal years
ended June 30, 2009 and 2008, no impairment was recorded with respect to
goodwill or identifiable intangible assets.
Identifiable
Intangible Assets and Goodwill
In
accordance with FAS No. 142, “Goodwill and Other Intangible Assets” (“FAS No.
142”), the Company does not amortize goodwill and intangible assets with
indefinite lives, but instead measures for impairment at least annually or when
events indicate that an impairment exists. As required by FAS No. 142, the
Company compares the fair value of the applicable reporting unit to its carrying
value.
Intangible
assets that are determined to have definite lives are amortized over their
useful lives and are measured for impairment only when events or circumstances
indicate the carrying value may be impaired in accordance with FAS No. 144,
discussed above. During the fiscal years ended June 30, 2009 and 2008, no
impairment was recorded.
Asset
Retirement Obligation
The
Company accounts for asset retirement obligations in accordance with the
provisions of FAS No. 143, “Accounting for Asset Retirement Obligations” (“FAS
No. 143”). This statement addresses financial accounting and reporting for
obligations associated with the retirement of tangible long-lived assets and the
associated retirement costs. Retirement is defined as the
other-than-temporary removal of a long-lived asset from service. The term
encompasses a sale, abandonment, recycling or disposal in some other
manner.
In fiscal
year 2005, as a result of the H & W acquisition, the Company recorded an
estimated liability for the removal and clean-up of three underground fuel
storage tanks and has estimated the remaining useful life of those tanks to be
ten years. At June 30, 2009 and 2008, the Company had a liability for
asset retirement obligations of $147,000 and $136,000, respectively, which is
classified as other long-term liabilities in the accompanying Consolidated
Balance Sheets. In fiscal years 2009 and 2008, the Company recorded
accretion expense of $11,000 and $10,000, respectively.
As per
FAS No. 123R, “Share-Based Payment”, the Company expenses the grant-date fair
value of stock options and other equity-based compensation granted to
employees. Amortization of stock compensation expense for the years ended
June 30, 2009 and 2008 was $292,000 and $504,000, respectively, and is included
in selling, general and administrative expenses in the Consolidated Statements
of Operations.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
The fair
value of each option is estimated on the date of grant using the Black-Scholes
option valuation model with the following weighted average
assumptions:
|
|
Years Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
Risk
free interest rate
|
|
|
3.22
|
%
|
|
|
4.57
|
%
|
Dividend
yield
|
|
|
0
|
%
|
|
|
0
|
%
|
Expected
volatility
|
|
|
105.4
|
%
|
|
|
103.4
|
%
|
Expected
life
|
|
8.0
years
|
|
|
7.9
years
|
|
Use of
the Black-Scholes model requires management to make certain assumptions with
respect to selected model input. The risk-free rate is based on a U.S.
Treasury zero-coupon bond issue with a remaining term equal to the expected term
of the option. The dividend yield is zero per share because we have not
paid dividends on Common Stock in the past and do not expect to pay dividends in
the foreseeable future. Expected volatilities are based on the historical
volatility of the Company’s stock. The Company uses historical data to
estimate option exercises and employee terminations within the valuation
model. Since the Company has limited historical exercised data for the
expected life of the options granted, it is estimating the expected life to be
equivalent to the remaining contractual life and represents the period of time
that options granted are expected to be outstanding. The fair value of the
stock options is expensed on a uniform straight-line basis over the vesting
period.
Recent
Accounting Pronouncements
In
September 2006, the FASB issued FAS Statement No. 157, “
Fair Value Measurements
”
(“FAS No. 157”). This standard provides guidance for using fair value to
measure assets and liabilities. Under FAS No. 157, fair value refers to
the price that would be received to sell an asset or paid to transfer a
liability in an orderly transaction between market participants in the market in
which the reporting entity transacts. In this standard, the FASB clarifies
the principle that fair value should be based on the assumptions that market
participants would use when pricing the asset or liability. In support of
this principle, FAS No. 157 establishes a fair value hierarchy that prioritizes
the information used to develop those assumptions. The fair value
hierarchy gives the highest priority to quoted prices in active markets and the
lowest priority to unobservable data, for example, the reporting entity’s own
data. Under the standard, fair value measurements would be separately
disclosed by level within the fair value hierarchy. Certain aspects of
this standard were effective for the financial statements issued for the Company
since the beginning of fiscal year 2009. The adoption of FAS No. 157 had
no impact on the Company’s consolidated financial position, results of
operations or cash flows. FASB Staff Position (“FSP”) FAS 157-2,
“Effective Date of FASB Statement No. 157,” issued in February 2008, provides a
one-year deferral to fiscal years beginning after November 15, 2008 of the
effective date of FAS No. 157 for nonfinancial assets and nonfinancial
liabilities, except those that are recognized or disclosed in financial
statements at least annually at fair value on a recurring basis. The
Company’s adoption of the remaining provisions of FAS No. 157 are not expected
to have an impact on the Company’s consolidated financial position, results of
operations or cash flows.
In
February 2007, FAS Statement No. 159, “
The Fair Value Option for Financial
Assets and Financial Liabilities
” (“FAS No. 159”), was issued. FAS
No. 159 enables companies to report selected financial assets and liabilities at
their fair value. This statement requires companies to provide additional
information to help investors and other users of financial statements understand
the effects of a company’s election to use fair value on its earnings. FAS
No. 159 also requires companies to display the fair value of assets and
liabilities on the face of the balance sheet when a company elects to use fair
value. FAS No. 159 was effective for the Company since the beginning of
fiscal year 2009. The Company’s adoption of FAS No. 159 had no impact on
the Company’s financial condition or results of operations because the Company
did not elect to record any financial assets or liabilities at fair
value.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
In
December 2007, the FASB issued FAS Statement No. 141 (revised 2007), “
Business Combinations”
(“FAS
No. 141R”), which replaces FAS No. 141. The statement retains the purchase
method of accounting for acquisitions, but requires a number of changes,
including changes in the way assets and liabilities are recognized in the
purchase accounting. It also changes the recognition of assets acquired
and liabilities assumed arising from contingencies, requires the capitalization
of in-process research and development at fair value, and requires the expensing
of acquisition-related costs as incurred. In April, 2009, the FASB issued
FSP FAS 141(R)-1, “
Accounting
for Assets Acquired and Liabilities Assumed in a Business Combination That Arise
from Contingencies
” (“FSP No. 131(R)-1”). This FSP amends and
clarifies FAS No. 141R to address application issues raised by preparers,
auditors, and members of the legal profession on initial recognition and
measurement, subsequent measurement and accounting, and disclosure of assets and
liabilities arising from contingencies in a business combination. FAS
No. 141R is effective for the Company beginning July 1, 2009 and will
be applied prospectively to business combinations completed on or after that
date. The Company estimates that the adoption of FAS No. 141R will result
in a $187,000 expense in the first quarter of fiscal year 2010 due to the
write-off of the deferred acquisition costs balance as of June 30, 2009,
which are no longer capitalized under FAS No. 141R.
In
December 2007, the FASB issued FAS Statement No. 160, “
Noncontrolling Interests in
Consolidated Financial Statements, an amendment of ARB 51
,” which changes
the accounting and reporting for minority interests (“FAS No. 160”).
Minority interests will be recharacterized as noncontrolling interests and will
be reported as a component of equity separate from the parent’s equity, and
purchases or sales of equity interests that do not result in a change in control
will be accounted for as equity transactions. In addition, net income
attributable to the noncontrolling interest will be included in consolidated net
income on the face of the income statement and, upon a loss of control, the
interest sold, as well as any interest retained, will be recorded at fair value
with any gain or loss recognized in earnings. FAS No. 160 is
effective for the Company beginning July 1, 2009 and will apply
prospectively, except for the presentation and disclosure requirements, which
will apply retrospectively. The standard will have no impact on our
financial condition, results of operations or cash flows.
In March
2008, the FASB issued FAS No. 161, “
Disclosures about Derivative
Instruments and Hedging Activities — an amendment of FAS Statement No.
133
” (“FAS No. 161”). This Standard requires enhanced disclosures
regarding derivatives and hedging activities, including: (a) the manner in which
an entity uses derivative instruments; (b) the manner in which derivative
instruments and related hedged items are accounted for under FAS No. 133, “
Accounting for Derivative
Instruments and Hedging Activities”
; and (c) the effect of derivative
instruments and related hedged items on an entity’s financial position,
financial performance, and cash flows. FAS No. 161 is effective for the
Company beginning July 1, 2009. As FAS No. 161 relates specifically to
disclosures, the standard will have no impact on our financial condition,
results of operations or cash flows.
In April
2008, the FASB issued FSP FAS No. 142-3, “
Determination of the Useful Life of
Intangible Assets
” (“FSP No. 142-3”). This standard amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under FASB Statement
No. 142, Goodwill and Other Intangible Assets. FSP No. 142-3 is effective
for the Company beginning July 1, 2009. Early adoption is prohibited. The
standard will have no impact on our financial condition, results of operations
or cash flows.
In May
2008, the FASB issued FSP APB 14-1, “
Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement)
” (“FSP No. 14-1”). This standard clarifies that
convertible debt instruments that may be settled in cash upon conversion
(including partial cash settlement) are not addressed by paragraph 12 of APB
Opinion No. 14, Accounting for Convertible Debt and Debt Issued with Stock
Purchase Warrants. Additionally, this FSP specifies that issuers of such
instruments should separately account for the liability and equity components in
a manner that will reflect the entity's nonconvertible debt borrowing rate when
interest cost is recognized in subsequent periods. FSP No. 14-1 is effective for
the Company beginning July 1, 2009. The standard will have no impact on
our financial condition, results of operations or cash flows as our historical
convertible debt did not allow for settlement in cash.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
In April
2009, the FASB issued FSP FAS 107-1 and APB 28-1
, “Interim Disclosures About Fair
Value of Financial Instruments”.
This FSP amends FAS No.
107, “
Disclosures about Fair
Value of Financial Instruments”,
to require disclosures about fair value
of financial instruments for interim reporting periods as well as in annual
financial statements, and also amends APB No. 28, “
Interim Financial Reporting”,
to require those disclosures in summarized financial information at
interim reporting periods. This FSP is effective for the Company beginning July
1, 2009. This FSP does not require disclosures for earlier periods
presented for comparative purposes at initial adoption. In periods after initial
adoption, this FSP requires comparative disclosures only for periods ending
after initial adoption. The adoption of this standard will have no impact on our
financial condition, results of operations or cash flows.
In May
2009, the FASB issued FAS Statement No. 165, “
Subsequent Events
” (“FAS No.
165”), which provides guidance to establish general standards of accounting for
and disclosures of events that occur after the balance sheet date but before
financial statements are issued or are available to be issued. FAS No. 165 also
requires entities to disclose the date through which subsequent events were
evaluated as well as the rationale for why that date was selected. FAS No.
165 is effective for interim and annual periods ending after June 15, 2009, and
accordingly, we adopted this Standard during the fourth quarter of fiscal 2009.
FAS No. 165 requires that public entities evaluate subsequent events through the
date that the financial statements are issued. We have evaluated subsequent
events through the time of the filing of these financial statements with the SEC
on September 28, 2009.
In
June 2009, the FASB issued FAS Statement No. 166, “
Accounting for Transfers of
Financial Assets, an amendment to FAS No. 140”
(“FAS No. 166”). FAS
No. 166 eliminates the concept of a qualifying special-purpose entity, changes
the requirements for derecognizing financial assets including limiting the
circumstances in which a company can derecognize a portion of a financial asset,
and requires additional disclosures. FAS No. 166 is effective for financial
statements issued for fiscal years beginning after November 15, 2009, and
interim periods within those fiscal years. The Company has not determined
the impact, if any, on its financial statements of this accounting
standard.
In June
2009, the FASB issued FAS Statement No. 167, “
Amendments to FASB Interpretation
No. 46(R)”
(“FAS No. 167”). FAS No. 167 revises the approach to
determine when an entity that is insufficiently capitalized or not controlled
through voting rights (referred to as a variable interest entity or VIE) should
be consolidated. The new consolidation model for VIEs considers whether the
enterprise has the power to direct the activities that most significantly impact
the VIE’s economic performance and shares in the significant risks and rewards
of the entity. FAS No. 167 requires companies to continually reassess their
involvement with VIEs to determine if consolidation is appropriate and provide
additional disclosures about their involvement with them. FAS No.
167 is effective for financial statements issued for fiscal years beginning
after November 15, 2009, and interim periods within those fiscal years.
The Company has not determined the impact, if any, on its financial statements
of this accounting standard.
In June
2009, the FASB issued FAS Statement No. 168, “
The FASB Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles - A
Replacement of FASB Statement No. 162”
(“FAS No. 168”). This
Statement establishes the Codification as the source of authoritative GAAP
recognized by the FASB to be applied by nongovernmental entities. Rules and
interpretive releases of the SEC under federal securities laws are also sources
of authoritative U.S. generally accepted accounting principles (GAAP) recognized
by the FASB to be applied by nongovernmental entities. On the
effective date of this Statement, the Codification will supersede all
then-existing non-SEC accounting and reporting standards. All other
non-grandfathered non-SEC accounting literature not included in the Codification
will become non authoritative. All guidance contained in the
Codification carries an equal level of authority. This Statement is
effective for financial statements issued for interim and annual periods ending
after September 15, 2009. The standard will have no impact on our
financial condition, results of operations or cash flows.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
3.
|
IDENTIFIABLE
INTANGIBLE ASSETS AND GOODWILL
|
The
following table summarizes the Company’s identifiable intangible assets and
goodwill balances as of June 30, 2009 and 2008 (in thousands):
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Gross
|
|
|
|
|
|
Net
|
|
|
Amortization
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Carrying
|
|
|
Accumulated
|
|
|
Carrying
|
|
|
Period
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
Amount
|
|
|
Amortization
|
|
|
Amount
|
|
|
(Years)
|
|
Amortized
intangible assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Customer
relationships
|
|
$
|
1,768
|
|
|
$
|
513
|
|
|
$
|
1,255
|
|
|
$
|
1,768
|
|
|
$
|
385
|
|
|
$
|
1,383
|
|
|
|
15
|
|
Favorable
leases
|
|
|
196
|
|
|
|
147
|
|
|
|
49
|
|
|
|
196
|
|
|
|
108
|
|
|
|
88
|
|
|
|
5
|
|
Trademarks
|
|
|
687
|
|
|
|
172
|
|
|
|
515
|
|
|
|
687
|
|
|
|
126
|
|
|
|
561
|
|
|
|
15
|
|
Supplier
contracts
|
|
|
801
|
|
|
|
601
|
|
|
|
200
|
|
|
|
801
|
|
|
|
441
|
|
|
|
360
|
|
|
|
5
|
|
Total
|
|
$
|
3,452
|
|
|
$
|
1,433
|
|
|
$
|
2,019
|
|
|
$
|
3,452
|
|
|
$
|
1,060
|
|
|
$
|
2,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
|
|
|
|
|
|
|
$
|
228
|
|
|
|
|
|
|
|
|
|
|
$
|
228
|
|
|
|
|
|
Amortization
expense is computed using the straight-line method over the useful lives of the
assets. Amortization expense for the years ended June 30, 2009 and
2008 was $373,000 and $379,000, respectively. Amortization expense
for the five succeeding fiscal years and thereafter is as follows (in
thousands):
Year ending
|
|
|
|
June 30,
|
|
Amortization
|
|
2010
|
|
$
|
357
|
|
2011
|
|
|
207
|
|
2012
|
|
|
157
|
|
2013
|
|
|
157
|
|
2014
|
|
|
157
|
|
Thereafter
|
|
|
984
|
|
Total
|
|
$
|
2,019
|
|
Summary
On June
29, 2009 (the “Effective Date”), the Company completed a comprehensive $40
million recapitalization program (the “Recapitalization”) that restructured all
of its debt and equity. After the Recapitalization, the Company’s
total debt was lowered by $4.5million. The Recapitalization also
resulted in a net increase of shareholders’ equity of $4.1
million.
The
Company estimates that its cash requirements for interest and dividends will be
reduced by over $1 million per year. (Unaudited).
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
On the
Effective Date, by virtue of various agreements with the Company’s existing debt
and equity investors, the Company extinguished all of its existing non-bank debt
and outstanding preferred stock, including: (a) $8.859 million in outstanding
August 2007 11.5% Senior Secured Convertible Promissory Notes (the “Secured
Notes”); (b) $725,000 in outstanding September 2008 12% Unsecured Convertible
Promissory Notes (“Existing Unsecured Notes”); (c) $2.263 million in 12%
Cumulative Dividend Convertible Series A Preferred Stock (“Series A Preferred”);
(d) the $1.787 million in 12% Cumulative Dividend Convertible Series B Preferred
Stock (“Series B Preferred”); (e) $149,000 in 12% Cumulative Dividend
Convertible Series C Preferred Stock (“Series C Preferred”) and (f) $617,000 in
accrued but unpaid interest and dividends on the Secured Notes, the Existing
Unsecured Notes and the Series A, Series B and Series C Preferred
Stock.
As part
of the Recapitalization, the Company converted its existing $25 million asset
based lending facility into a new, more favorable, three year $20 million asset
based lending facility and a $5 million 60 month amortized term loan, the
proceeds of which were used to pay down $4.867 million of the Secured Notes and
$125,000 of the Unsecured Notes.
The
balance of the consideration paid by the Company for the cancellation and
extinguishment of the existing investors’ debt and equity securities
was provided by the Company’s issuance of (i) 3,228 shares of a new 5.5%
Cumulative Dividend Series D Preferred Stock (“Series D Preferred”) at $400 per
share, or $0.40 per common share equivalent, for $1.291 million, (ii) 19,251,119
shares of Common Stock for $0.38 per share, or $7.315 million, (iii) a 5 year
$800,000 5.5% Unsecured Note (the “New Unsecured Note”); and (iv) $43,934 in
cash. The agreed upon value of the Common Stock issued in the
Recapitalization was priced at $0.38 per share, which was greater than the
closing bid price of the Common Stock on the Nasdaq Capital Market on the
trading day immediately preceding the Effective Date.
New Bank
Financing
On
June 29, 2009
, the Company entered into
the Eighteenth Amendment to the Loan and Security Agreement (the “
Eighteenth Amendment
”), which amend
ed
the Loan and Security Agreement (the
“
Loan
Agreement
”) between the
Company, SMF Services, Inc., H & W Petroleum Company, Inc. and Wachovia
Bank, National Association (the “
Bank
”), to, among other things, extend the
renewal date for three years from July 1, 2009 to July 1, 2012,
decrease the revolving loan limit from $25 million to $20
million, provide for a new 60 month amortized term loan in the
principal amount of $5.0 million (the “Term Loan”), add the
Company’s vehicles and field operating equipment as additional
collateral
(previously
used as collateral for the Secured Notes)
, and modify certain
covenants.
New Unsecured No
te
The
only non-Bank debt incurred by the Company in the Recapitalization was an
$800,000 unsecured 5.5% interest only, subordinated promissory note (the “New
Unsecured Note”) issued to an existing institutional investor in exchange for
$800,000 of one of the Secured Notes. The institutional investor also
exchanged $200,000 of the same Secured Note for shares of Common Stock at
$0.38 per share.
The New
Unsecured Note is subordinated to all other existing debt of the Company,
including any amounts owed now or in the future to the Bank. The
holder of the New Unsecured Note entered into a debt subordination agreement
(the “Subordination Agreement”) with the Company and the Bank, whereby it
expressly subordinated its rights under the New Unsecured Note to the
Bank.
The
principal balance of the New Unsecured Note is due at maturity on July 1,
2014. Subject to the limitations in the Subordination
Agreement, interest will be paid semi-annually, except that accrued interest
payments for the first thirteen months will be deferred until on or about August
15, 2010. Thereafter, starting January 15, 2010, semi-annual interest
payments will be scheduled on or about each January 15th and July
15th. The amounts due under the New Unsecured Note will become due
and payable upon the occurrence of customary events of default, provided,
however, that the deferral of any payment in accordance with the Subordination
Agreement will not constitute an event of default. If permitted under
the Subordination Agreement, the Company may pre-pay the New Unsecured Note, in
whole or in part, without prepayment penalty or premium.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Twenty-five
percent (25%) of the original principal amount of the New Unsecured Note, or
$200,000, may be converted into shares of the Common Stock at $0.50 per share
(the “Conversion Price”) at the option of the noteholder. The number
and kind of securities purchasable upon conversion and the Conversion Price are
subject to customary adjustments for stock dividends, stock splits and other
similar events.
Exchange
Agreements
As part
of the Recapitalization, the Company entered into a series of agreements on the
Effective Date (the “Exchange Agreements”) pursuant to which it (1)
exchanged all of the outstanding shares of its Series A, Series
B and Series C Preferred (collectively, the “Preferred Stock”)
for shares of Common Stock, including the accrued but unpaid dividends thereon;
(2) exchanged the outstanding principal of all but one of the Existing
Unsecured Notes for shares of Common Stock; and (3) paid
down 50% of the principal balance of all but two of the Secured Notes and the
remaining Existing Unsecured Note with proceeds from the Term Loan, and then
exchanged the remaining principal balance of such notes for shares of either
Common Stock or a new, 5.5% dividend bearing, $0.01 par value Convertible
Preferred Stock (“Series D Preferred”) and exchanged any accrued but unpaid
interest on such notes for shares of Common Stock. The Company also
used proceeds from the Term Loan to redeem, in full, the two Secured Notes that
were not the subject of Exchange Agreements (the “Redeemed Notes”), including
all accrued but unpaid interest thereon. The collateral for the
Secured Notes was used for the new Bank Financing.
In
particular, pursuant to the Exchange Agreements, the Company exchanged all of
the 4,114 outstanding shares of Series A Preferred, all of the 1,985 outstanding
shares of Series B Preferred, and of the 229 outstanding shares of Series C
Preferred, including all accrued but unpaid dividends thereon, for 11,378,023
shares of Common Stock. The Company also exchanged $475,000 of the
aggregate principal amount outstanding on the Existing Unsecured Notes and the
related accrued but unpaid interest for 1,327,586 shares of Common
Stock.
In the
Recapitalization, the Company paid a total of $4.87 million of the $8.86
million principal amount outstanding on the Secured Notes and paid $125,000
of the $250,000 principal amount outstanding on one Existing Unsecured Note in
cash. The Company exchanged the remaining balance on these notes,
including the related accrued but unpaid interest, except for the Redeemed
Notes, for 6,572,264 shares of Common Stock, 3,228 shares of its Series D
Preferred and $800,000 in the New Unsecured Note. The Common
Stock was priced at $0.38 per share, which was greater than the closing bid
price of the Common Stock on the Nasdaq Capital Market on the trading day
immediately preceding the Effective Date. The shares of Series D
Preferred, which are convertible into 1,000 shares of Common Stock, were
exchanged for $400 per share, or $0.40 per common share
equivalent. The $4.87 million principal repayment of the Secured
Notes included the redemption, in full, of the Redeemed Notes, which had an
aggregate principal amount of $875,000. The Company also paid the
$51,000 of accrued but unpaid interest on the Redeemed Notes in cash on the
Effective Date.
Pursuant
to the Exchange Agreements, the Company issued a total of 19,251,119 shares of
Common Stock with a total aggregate value of $7.32 million and 3,228 shares
of Series D Preferred with a total aggregate value of $1.29 million. Each share
of Series D Preferred is convertible into 1,000 shares of the Common Stock at a
price per share of $0.40 per share, $0.03 above the closing bid price of the
Common Stock on June 29, 2009.
Philadelphia
Brokerage Company (“PBC”), received fees of $380,000 in connection with the
Recapitalization pursuant to a February 1, 2009, investment banking agreement
between PBC and the Company. PBC’s fees were paid with a combination
of cash and securities, consisting of $280,000 in cash and shares of Common
Stock. For the securities, a total of 263,156 shares of Common Stock
were issued to PBC on the Effective Date, priced at $0.38, the same price
used for the Common Stock issued pursuant to the Exchange
Agreements.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
The
Company’s officers and directors who had participated in the Company’s private
offerings of the Series A Preferred Stock and Existing Unsecured Notes also
participated in the Recapitalization. The officers, including one
member of the Board of Directors, participated in the exchange of Series A
Preferred for shares of Common Stock on the same terms as all of the other
holders of Series A Preferred. In addition, a non-employee director
holding an Existing Unsecured Note entered into an Exchange Agreement for his
Existing Unsecured Note that was similar to those entered into by some holders
of the Secured Notes, whereby he received a combination of cash, Series D
Preferred Stock and Common Stock for his Existing Unsecured Note.
The
officer exchanges of Series A Preferred for Common Stock were as follows:
Richard E. Gathright, Chief Executive Officer, President and Chairman of the
Board, exchanged 36 shares of Series A Preferred for 52,105 shares of Common
Stock, and $592 in accrued but unpaid dividends for an additional 1,559 shares
of Common Stock. Michael S. Shore, Chief Financial Officer, Senior
Vice President and Treasurer, exchanged 36 shares of Series A Preferred for
52,105 shares of Common Stock $592 in accrued but unpaid dividends for 1,559
shares of Common Stock. Paul C. Vinger, Senior Vice President -
Corporate Planning and Fleet Operations, exchanged 36 shares of Series A
Preferred for 52,105 shares of Common Stock and $592 in accrued but unpaid
dividends for 1,559 shares of Common Stock. Gary G. Williams III,
Senior Vice President - Commercial Operations, exchanged 18 shares of Series A
Preferred for 26,053 shares of Common Stock and $296 in accrued but unpaid
dividends for 779 shares of Common Stock. Robert W. Beard, Senior
Vice President - Marketing & Sales and Investor Relations Officer exchanged
10 shares of Series A Preferred for 14,474 shares of Common Stock and $165 in
accrued but unpaid dividends for another 433 shares of Common Stock. Timothy E.
Shaw, Senior Vice President - Information Services & Administration and
Chief Information Officer, exchanged 10 shares of Series A Preferred for 14,474
shares of Common Stock and $165 in accrued but unpaid dividends for 433 shares
of Common Stock. L. Patricia Messenbaugh, Vice President - Finance
& Accounting, Chief Accounting Officer and Principal Accounting Officer,
exchanged 9 shares of Series A Preferred for 13,026 shares of Common Stock and
$148 in accrued but unpaid dividends for 390 shares of Common
Stock.
C. Rodney
O’Connor, a non-employee director of the Company and the beneficial owner of
1,539,383 shares of Common Stock before the Recapitalization, was repaid 50% of
the $250,000 principal amount outstanding on his Existing Unsecured Note in cash
and exchanged the remaining 50% of the principal amount outstanding for 312
shares of the Company’s Series D Preferred. In addition, Mr. O’Connor
exchanged the $10,167 in accrued but unpaid interest for 26,754 shares of Common
Stock. After the Recapitalization, Mr. O’Connor was the beneficial
owner of 1,466,768 shares of Common Stock, including 312,000 shares attributable
to the conversion rights underlying his 312 shares of Series D Preferred
Stock.
Deemed
Dividend and Non-cash Inducement charge
As
a result of the Recapitalization, the Company redeemed all the outstanding
Series A, Series B, and Series C preferred shares through the issuance of an
aggregate of 11,047,504 common shares at the negotiated price of $0.38 per
share, which was an amount lower than the original terms of the securities
issuable. As per EITF No. D-42, “The Effect on the Calculation of
Earnings per Share for the Redemption or Induced Conversion of Preferred Stock,”
the Company reported the fair value of additional securities issued to the
preferred shareholders as a non-cash deemed dividend of $1.75 million, which was
a calculation of the difference between the 6,328,000 common shares that would
have been issuable under the original conversion rights that existed in the
convertible preferred shares and the 11,047,504 common shares issued at $0.38
cents upon the redemption exchange. See Note 9 – Shareholders’
Equity.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Also in
the Recapitalization, the Company extinguished a portion of the August 2007 and
the September 2008 Notes (“the Notes”) through the issuance of 5,330,658 shares
and 1,249,999 shares of Common Stock, respectively, at the negotiated price of
$0.38 per share, which was higher than the $0.37 per share closing bid price on
the trading day immediately preceding the June 29, 2009
Recapitalization. The original terms of the Notes allowed for a
conversion of 50% of the August 2007 Notes and 100% of the September 2008 Notes
into common stock. The negotiated issuance price of $0.38 per share
in the Recapitalization was based on then current market prices, and it was
lower than the original conversion prices of $1.46 per share and $0.65 per share
of the August 2007 Notes and the September 2008 Notes,
respectively. Since the extinguishment of the Notes through issuance
of Common Stock was done at close to current market prices of the Common Stock,
the Company issued an aggregate of 4,462,456 more shares than it would have
issued for the convertible equivalent under the original terms of the
Notes.
Statement
of Financial Accounting Standards No. 84, “Induced Conversion of Convertible
Debt (as amended)” (“FAS No. 84”), specifies the method of accounting
for conversions of convertible debt to equity securities when the debtor induces
conversion of the debt by offering additional securities or other consideration
to convertible debt holders. In accordance with FAS 84, an expense is
recognized if and to the extent that “additional consideration is paid to debt
holders for the purpose of inducing prompt conversion of the debt to equity
securities (sometimes referred to as a convertible debt
‘sweetener’).” While the Company’s purpose in effecting the June 2009
Recapitalization was to effect a complete restructuring of its debt and equity
structure via a series of transactions that would have the effect of reducing
its outstanding debt and future obligations and there was no intent to induce
any conversion of the outstanding debt to common stock, a portion of the
exchange of the outstanding carrying value of $9.6 million in
convertible debt for an equal aggregate value of cash, common stock and
preferred stock is required by FAS 84 to be accounted for as an induced
conversion of outstanding debt securities. While we believe that the
application of FAS No. 84 does not reflect the economic substance of the value
exchanged in this portion of the Recapitalization transaction, we have reported
the required non-cash charge for the difference between the number of common
shares issued compared to the common shares that would have been issued under
the original terms of the convertible debt instrument times the market
price.
The
Company understands that the accounting interpretation of FAS No. 84 is that an
inducement occurs any time additional shares are issued in the extinguishment of
convertible debt regardless of the absence of an economic loss or intent of the
parties to the transaction. As a result, the application of FAS No.
84 to the exchange of existing convertible debt securities for common stock
resulted in the recording of a non-cash “inducement” accounting charge of $1.65
million, which was a calculation of the difference between the 2,118,201 common
shares that would have been issuable to the applicable note holder under the
original conversion rights that existed in the convertible Notes and the
6,580,657 common shares exchanged at $0.38 cents upon the
extinguishment. The shares amounts include the impact of the July 6,
2009 transaction as describe in Note 15 – Subsequent Events. This
non-cash charge is deemed a financing expense to extinguish the Notes and it is
included in the Consolidated Statements of Operations with a corresponding
increase in Additional paid-in capital and therefore the net impact has no
effect to total Shareholder’s Equity.
5.
|
LINE
OF CREDIT PAYABLE
|
On June
29, 2009, the Company completed the Recapitalization, described above in Note
4 – Recapitalization. Concurrent with the Recapitalization, the
Company and its principal lender amended the Company’s existing $25.0 million
revolving line of credit to provide for a new, more favorable, $25.0 million
loan facility, comprised of a three year $20.0 million revolver coupled with a
new $5.0 million, 60 month, fully amortized term loan. The Eighteenth
Amendment to the Loan and Security Agreement between the Company and its
principal lender also extended the renewal date of the revolving line of credit
from July 1, 2009 to July 1, 2012, added the Company’s vehicles and field
operating equipment as additional collateral, and modified several covenants in
the loan agreement in a manner that the Company believes will be favorable to
the Company.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
The
Company’s $20.0 million line of credit permits the Company to borrow up to 85%
of the total amount of eligible accounts receivable and 65% of eligible
inventory, both as defined. Outstanding letters of credit reduce the
maximum amount available for borrowing. Outstanding borrowings under
the line are secured by substantially all Company assets including its
transportation fleet and related field equipment.
Interest
is payable monthly based on a pricing matrix agreed with the bank. At
June 30, 2009, the interest rate for the line of credit was at LIBOR Floor
of 0.75 plus 3.00%, or 3.75%. As a result of the Eighteenth
amendment, the applicable margin for subsequent periods will be determined
quarterly based on a matrix with margins of 3.00% to 3.75% over the LIBOR
lending rate determined by the Company meeting certain EBITDA to fixed charge
coverage ratios, as defined.
As of
June 30, 2009 and 2008, the Company had outstanding borrowings of $7.8 million
and $19.8 million, respectively, under its line of credit. The line
of credit is classified as a current liability in accordance with EITF 95-22,
“
Balance Sheet Classification
of Borrowings Outstanding under Revolving Credit Agreements
”. Based
on eligible receivables and inventories, and letters of credit outstanding at
June 30, 2009 and 2008, the Company had $2.4 million and $1.8 million,
respectively, of cash availability under the line of credit.
The
Company’s line of credit provides for certain affirmative and negative covenants
that may limit the total availability based upon the Company’s ability to meet
these covenants. At June 30, 2009, the financial covenants included a
minimum daily availability of $750,000, a fixed charge coverage ratio of 1.1 to
1.0, and a capital expenditure limitation for fiscal year 2009 of
$750,000. At June 30, 2009 and 2008, the Company had a maximum amount
of $1.75 million and $1.5 million, respectively, for which letters of credit
could be issued. At June 30, 2009 and 2008, $1.6 million and $1.35
million, respectively, had been issued in letters of credit.
Previously,
in September 2008, the Company and its line of credit lender had entered into
the Sixteenth Amendment and the Seventeenth Amendment to the loan and security
agreement. These amendments allowed for the issuance of unsecured
promissory notes, extended the maturity date from December 31, 2008 to July 1,
2009, and modified the variable interest rate to a range of 0.75% to 2.75% over
the prime lending rate based on the Company meeting certain fixed charge
coverage ratios.
The Company’s new $25.0 million loan
facility continues to require the Company to obtain the consent of the lender
prior to incurring additional debt, or entering into mergers, consolidations or
sales of assets. Failure to comply with one or more of the covenants
in the future could affect the amount the Company can borrow and thereby
adversely affect the Company’s liquidity and financial condition. At
June 30, 2009, the Company was in compliance with all the requirements of its
covenants under the agreement.
6.
|
SHORT-TERM
PROMISSORY NOTES
|
On
November 19, 2007, the Company obtained an aggregate of $2.0 million in
short-term notes from a small group of individual and institutional investors
(the “November 2007 Notes”). The proceeds were used for general
working capital purposes. The Company’s obligations under the
November 2007 Notes were unsecured. The November 2007 Notes
originally had a six-month term maturing in May 2008, which was extended to July
2008. The Company incurred $42,000 in issuance costs which were
amortized over the term of the notes. Interest payable on the
outstanding principal balance of the November 2007 Notes was 1.5% per
month. The effective yield of these notes was 21.0%.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
On
February 29, 2008, the holders of the November 2007 Notes exchanged the entire
$2.0 million principal balance, plus $6,000 of the accrued but unpaid interest
thereon into shares of the Company’s Series A Preferred Stock at $550
per share. For additional information see Note 9, Shareholders’
Equity. The issuance costs of $42,000 had a remaining unamortized
balance of $24,000 which was written-off and recorded as a loss on
extinguishment of promissory notes.
7.
|
LONG-TERM
DEBT (INCLUDES TERM LOAN AND PROMISSORY
NOTES)
|
Long-term
debt consisted of the following on June 30 (in thousands):
|
|
June 30,
|
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
|
|
|
|
|
|
|
June
2009 Term loan (the
“
Term Loan”), fully
amortized, 60 monthly principal payments of approximately $83,000
commencing on August 1, 2009; variable interest due monthly, 4.5% at June
30, 2009; secured by substantially all Company assets; effective interest
rate of 6.44%. For additional details, see
below.
|
|
$
|
5,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
June
2009 unsecured convertible subordinated promissory note (the “June 2009
Note”) (5.5% interest due semi-annually, January 15 and July 15, beginning
January 15, 2010; interest accrued for first 13 months deferred and due on
or about August 15, 2010); matures July 1, 2014 in its entirety; effective
interest rate of 6.27%. For additional details, see below.
|
|
|
800
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
August
2007 senior secured convertible subordinated promissory notes (the “August
2007 Notes” or the “Secured Notes”) (11.5% interest due semi-annually,
January 1 and July 1); matured December 31, 2009 in its entirety;
effective interest rate of 14.5% including cost of warrants and other debt
issue costs. Fully extinguished on June 29, 2009 with the
Recapitalization. For additional details, see
below.
|
|
|
-
|
|
|
|
8,859
|
|
|
|
|
|
|
|
|
|
|
Unamortized
debt discount
|
|
|
-
|
|
|
|
(65
|
)
|
|
|
|
|
|
|
|
|
|
Total
debt
|
|
|
5,800
|
|
|
|
8,794
|
|
|
|
|
|
|
|
|
|
|
Less:
current portion
|
|
|
(917
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Long-term
debt, net
|
|
$
|
4,883
|
|
|
$
|
8,794
|
|
August
2007 Notes
On August
8, 2007, the Company sold $11.8 million in debt and equity securities (the
“August 2007 Offering”). The Company used a portion of the proceeds
of the August 2007 Offering to satisfy the balance of its outstanding secured
promissory notes issued on August 29, 2003, January 25, 2005 and September 1,
2005 (the “Satisfied Notes”), and to lower the Company’s total senior secured
convertible subordinated debt from $11.2 million
to $10.6 million on
August 8, 2007. As a result of this transaction, the Company recorded
a loss on extinguishment of promissory notes of $1.6 million consisting of the
write-off of unamortized debt discount and debt costs, a pre-payment penalty,
and a gain for the excess carrying value of the Notes over the extinguishment
price. See Note 7 – Long-term Debt –
Gain/(Loss) of Extinguishment
of Promissory Notes, net.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
In the
August 2007 Offering, the Company sold $10.6 million in 11½% senior secured
convertible subordinated promissory notes maturing in their entirety on December
31, 2009 (the “August 2007 Notes” or the “Secured Notes”), including $5.7
million sold to new institutional and private investors and $4.9 million to then
current holders of the Company’s secured debt. The Company paid a
total commission of $400,000 to the placement agent, $94,000 of which was paid
through the issuance of 63,327 shares of Common Stock at the offering price of
$1.48 per share. For information on the $1.2 million in equity
securities sold in the August 2007 Offering, see Note 9 – Shareholders’
Equity.
The
holders of the Notes had the right to convert up to fifty percent (50%) of the
principal amount of the August 2007 Notes into shares of the Common Stock at
$1.46 per share. The Company registered the resale of the shares
under the Securities Act of 1933, as amended, including the shares into
which the August 2007 Notes may be converted and the shares obtained upon
exercise of the warrants. As a result of the conversion feature, the
Company recorded $37,000 as a beneficial conversion feature which was being
amortized under the effective interest method as a non-cash discount over the
respective term of the debt. As of June 30, 2009, there were no
conversion share rights outstanding as the related Notes were satisfied in March
2008 and June 2009, as described below.
On March
12, 2008, some of the holders of the August 2007 Notes exchanged $1.75 million
in principal balance of the August 2007 Notes, plus a portion of the accrued but
unpaid interest thereon in the amount of $37,000 into shares of the Company’s
Series B Preferred Stock at $900 per share. For additional
information see Note 9 – Shareholders’ Equity. The Company recorded a
loss on debt extinguishment of $84,000 consisting of the write off of
unamortized deferred debt costs and unamortized discounts related to these
notes. See Note 7 – Long-Term Debt –
Gain/(Loss) of Extinguishment
of Promissory Notes, net.
September
2008 Notes
On September 2, 2008, the Company sold
$725,000 in 12% unsecured convertible promissory notes (the “September 2008
Notes” or the “Unsecured Notes”) maturing on September 1, 2010, to
accredited investors, including a $250,000 participation by a related
party. The Company used the proceeds for working capital purposes,
including the enhancement of short-term supplier credit. The
September 2008 Notes were unsecured and expressly subordinated to any amounts
owed to the Company’s primary lender pursuant to a subordination agreement
between the note holders and the lender. The unpaid principal amount
of the September 2008 Notes and the accrued but unpaid interest thereon may be
converted into shares of our Common Stock at $0.65 per share, which was above
the market price of the Common Stock on the date of the offering.
Deferral
of interest
In
January 2009, the holders of the August 2007 Notes agreed to defer the $519,000
interest payment originally due on the August 2007 Notes from January 1, 2009,
to April 15, 2009. As consideration for this deferral, the Company
paid a deferral fee equal to 1% of the outstanding principal balance, or
$88,000, of which 50% was paid in cash, with the remainder satisfied through
issuance of unregistered shares of Common Stock. For purposes of
determining the number of shares to be issued for the stock portion of the
deferral fee or upon conversion of the Payment, shares were valued at $0.29 per
share, the official closing price on the Nasdaq Stock Market on January 22,
2009, the trading day immediately preceding the effective date of the
Agreements. An aggregate of 158,328 unregistered shares of Common
Stock were issued to Holders, either as part of the deferral fee or for
conversion of the Payment of any interest.
In March
2009, the holders of the September 2008 Notes agreed to defer the $44,000
interest payment originally due March 1, 2009, until April 15,
2009. As consideration for the deferral, the Company paid a deferral
fee equal to 1% of the outstanding principal balance, or $7,000, of which 50%
was paid in cash, with the remainder satisfied through issuance of 12,499
unregistered shares of Common Stock. The Common Stock was valued at
$0.29 per share, which was the same price used for the Deferral Fee on the
August 2007 Notes.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Recapitalization
– Extinguishment of August 2007 Notes and September 2008 Notes, Issuance of New
Term Loan and June 2009 Notes
On June
29, 2009, as a result of the Recapitalization described in Note 4 –
Recapitalization, the Company restructured all of its debt and
equity. In connection therewith, the Company and its principal lender
amended the Company’s existing $25.0 million revolving line of credit agreement
to provide for a new $25.0 million loan facility, which included a new $5.0
million fully amortized 60 month term loan (the “Term Loan”). The
proceeds of the Term Loan were used to pay down $4.867 million of the August
2007 Notes and $125,000 of the September 2008 Notes. The interest on
the Term Loan is payable monthly and the interest rate is based on a pricing
matrix with
margins of 3.75% to
4.50% over the LIBOR lending rate determined by the Company meeting certain
EBITDA to fixed charge coverage ratios, as defined. At June 30, 2009,
the interest rate was 4.50%.
Also as
part of the June 29, 2009 Recapitalization, the Company entered into various
agreements with the Company’s existing debt and equity investors that
extinguished all of its existing non-bank debt and outstanding preferred
stock.
In
particular, the Company extinguished the $8.9 million outstanding principal
balance of the August 2007 Notes as follows (in thousands):
Cash
|
|
$
|
4,867
|
|
Issuance
of Preferred Stock D
|
|
|
1,166
|
|
Issuance
of Common Stock
|
|
|
2,026
|
|
Issuance
of June 2009 Note
|
|
|
800
|
|
|
|
|
|
|
Total
|
|
$
|
8,859
|
|
The
Company used the majority of the proceeds from the Term Loan to extinguish $4.9
million of the August 2007 Notes. The Company extinguished $1.2
million of the August 2007 Notes through the issuance of 2,916 shares of
Series D Convertible Preferred Stock (“Preferred Stock D”) at $400 per
share. Each preferred share is convertible into 1,000 shares of
Common Stock at $0.40 per share. The Company extinguished
$2.0 million of the August 2007 Notes through the issuance of 5,330,658
shares of Common Stock at $0.38 per share. The Company
extinguished $800,000 of the August 2007 Notes through the issuance of a new,
unsecured convertible subordinated promissory note in the principal amount of
$800,000 (the “June 2009 Note”). See Note 4 – Recapitalization – New
Unsecured Note.
Additionally,
the Company extinguished the $725,000 of the September 2008 Notes as follows (in
thousands):
Cash
|
|
$
|
125
|
|
Issuance
of Preferred Stock D
|
|
|
125
|
|
Issuance
of Common Stock
|
|
|
475
|
|
|
|
|
|
|
Total
|
|
$
|
725
|
|
The
Company used part of the proceeds from the new $5.0 million Term Loan to
extinguish $125,000 of the September 2008 Notes. The Company extinguished
$125,000 of the September 2008 Notes through the issuance of 312 shares of
Series D Convertible Preferred Stock at $400 per share. Each
preferred share is convertible into 1,000 shares of Common Stock at $0.40 per
share. The Company extinguished $475,000 of the September 2008 Notes
through the issuance of 1,249,999 shares of Common Stock at $0.38 per
share.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
The
Company incurred $770,000 in fees related to the Recapitalization, of which
$267,000 were recorded to equity and $503,000 as debt issuance
costs. The placement agent received $380,000 in fees, which were paid
in common shares and $280,000 in cash. For the common shares, a total
of 263,156 shares of Common Stock were issued on June 29, 2009, priced at
$0.38, the same price used for the Common Stock issued pursuant to the exchange
agreements.
Gain/(Loss)
on Extinguishment of Promissory Notes, net
Fiscal
Year 2009
In fiscal
2009, as a result of the extinguishment of the August 2007 Notes in the
Recapitalization, the remaining unamortized debt costs of $118,000 and
unamortized debt discounts of $23,000 related to the exchanged notes were
written off as losses on extinguishment of debt.
As a
result of recording at fair value the Common Stock and the Series D Preferred
Stock issued to extinguish a portion of the August 2007 Notes and the September
2008 Notes, the Company recorded gains on extinguishment of $145,000, and
$23,000, respectively. The fair value of the Common Stock was
estimated using the closing market bid price of the day prior to the June 29,
2009 transaction, which was $.037 per share. Since the shares were
exchanged at $0.38, the $0.01 premium per share resulted in a
gain. The fair value of the preferred stock was estimated taking into
consideration the fair value of the convertible common shares, the premium
derived from a $0.40 conversion price and the fair value of the dividend
component, all of which resulted in a fair value of $0.37 per
share. The gains recorded were the result of an excess of the
carrying value of the notes over the fair value of the Common Stock and
Preferred Stock issued.
Fiscal
Year 2008
In
connection with the issuance of certain promissory notes in August 2003, January
2005 and September 2005 Notes, which were redeemed on August 8, 2007, the
Company had recorded unamortized debt discounts that were being amortized under
the effective interest method as non-cash interest expense over the respective
term of the debt issued. These were non-cash discounts related to the
valuation of the Common Stock warrants issued to the note holders and the
placement agent in the financing transactions that did not reduce the amount of
principal cash repayments required to be made by the Company. As a
result of the early redemption of these promissory notes on August 8, 2007, the
Company recorded net losses on extinguishment of $1.6 million in the
consolidated statements of operations.
In
connection with the November 2007 Notes, the Company incurred $42,000 in
issuance costs, which were amortized over the term of the notes. As a
result of the exchange of the notes for Series A Preferred Stock in February
2008, the unamortized issuance costs amount of $24,000 were written off and
recorded as loss on extinguishment.
Additionally,
in connection with the August 2007 Notes, the Company recorded unamortized debt
discounts of $112,000, which were amortized as non-cash interest expense over
the term of the notes, related to the valuation of the Common Stock warrants
issued to the noteholders. As a result of the exchange of the August 2007
Notes for Series B Preferred Stock in March 2008, the unamortized debt discount
costs of $15,000 related to the exchanged notes were recorded as part of a loss
on extinguishment of debt along with the write off of $69,000 of unamortized
debt costs.
The
following summarizes the components of the net (gain)/loss on extinguishment of
promissory notes as recorded in the fiscal 2009 and 2008 consolidated statements
of operations (in thousands):
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
|
|
Year Ended
|
|
|
|
June 30, 2009
|
|
Write
offs of costs and gain related to exchanged August 2007 Notes under
the
Recapitalization:
|
|
|
|
Unamortized
debt costs
|
|
$
|
118
|
|
Unamortized
debt discounts
|
|
|
23
|
|
Gain
on extinguishment of August 2007 Notes
|
|
|
(145
|
)
|
Gain
on extinguishment of September 2008 Notes
|
|
|
(23
|
)
|
Gain
on extinguishment of promissory notes, net
|
|
$
|
(27
|
)
|
|
|
Year Ended
|
|
|
|
June 30, 2008
|
|
Write
offs of costs and gain related to the refinancing of the August
2003,January 2005 and September 2005 Notes:
|
|
|
|
Unamortized
debt costs
|
|
$
|
443
|
|
Unamortized
debt discounts
|
|
|
978
|
|
Cash
pre-payment penalty
|
|
|
270
|
|
Gain
on extinguishment
|
|
|
(50
|
)
|
Write
off of unamortized debt costs related to the exchanged November 2007 Notes
for Preferred Stock Series A
|
|
|
24
|
|
Write
offs related to exchanged August 2007 Notes for Preferred Stock Series
B:
|
|
|
|
|
Unamortized
debt costs
|
|
|
69
|
|
Unamortized
debt discounts
|
|
|
15
|
|
Loss
on extinguishment of promissory notes, net
|
|
$
|
1,749
|
|
To the
extent that the gain or loss and the non-cash FAS 84 inducement on
extinguishment of convertible notes constitutes the recognition of
previously deferred interest or finance cost, it is considered interest expense
or income for the calculation of certain interest expense or income
amounts.
Non-cash
FAS 84 inducement on extinguishment of promissory notes
Also in
the Recapitalization, the Company extinguished a portion of the August 2007 and
the September 2008 Notes (“the Notes”) through the issuance of 5,330,658 shares
and 1,249,999 shares of Common Stock, respectively, at the negotiated price of
$0.38 per share, which was higher than the $0.37 per share closing bid price on
the trading day immediately preceding the June 29, 2009
Recapitalization. The original terms of the Notes allowed for a
conversion of 50% of the August 2007 Notes and 100% of the September 2008 Notes
into common stock. The negotiated issuance price of $0.38 per share
in the Recapitalization was based on then current market prices, and it was
lower than the original conversion prices of $1.46 per share and $0.65 per share
of the August 2007 Notes and the September 2008 Notes,
respectively. Since the extinguishment of the Notes through issuance
of Common Stock was done at close to current market prices of the Common Stock,
the Company issued an aggregate of 4,462,456 more shares than it would have
issued for the convertible equivalent under the original terms of the
Notes.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Statement
of Financial Accounting Standards No. 84, “Induced Conversion of Convertible
Debt (as amended)” (“FAS No. 84”), specifies the method of accounting
for conversions of convertible debt to equity securities when the debtor induces
conversion of the debt by offering additional securities or other consideration
to convertible debt holders. In accordance with FAS No. 84, an
expense is recognized if and to the extent that “additional consideration is
paid to debt holders for the purpose of inducing prompt conversion of the debt
to equity securities (sometimes referred to as a convertible debt
‘sweetener’).” While the Company’s purpose in effecting the June 2009
Recapitalization was to effect a complete restructuring of its debt and equity
structure via a series of transactions that would have the effect of reducing
its outstanding debt and future obligations and there was no intent to induce
any conversion of the outstanding debt to common stock, a portion of the
exchange of the outstanding carrying value of $9.6 million in
convertible debt for an equal aggregate value of cash, common stock and
preferred stock is required by FAS No. 84 to be accounted for as an induced
conversion of outstanding debt securities. While we believe that the
application of FAS No. 84 does not reflect the economic substance of the value
exchanged in this portion of the Recapitalization transaction, we have reported
the required non-cash charge of approximately $1.65 million for the
difference between the number of common shares issued compared to the number of
common shares that would have been issued under the original terms of the
convertible debt instrument, times the market price on the conversion
date.
The
Company understands that the accounting interpretation of FAS No. 84 is that an
inducement occurs any time additional shares are issued in the extinguishment of
convertible debt regardless of the absence of an economic loss or intent of the
parties to the transaction. As a result, the application of FAS No.
84 to the exchange of existing convertible debt securities for common stock
resulted in the recording of a non-cash “inducement” accounting charge of $1.65
million, which was a calculation of the difference between the 2,118,201 common
shares that would have been issuable to the applicable note holder under the
original conversion rights that existed in the convertible Notes and the
6,580,657 common shares exchanged at $0.38 cents upon the
extinguishment. The shares amounts include the impact of the July 6,
2009 transaction as describe in Note 15 – Subsequent Events. This
non-cash charge is deemed a financing expense to extinguish the Notes and it is
included in the Consolidated Statements of Operations and with a corresponding
increase in Additional paid-in capital and therefore the net impact has no
effect to total Shareholder’s Equity.
Future
debt payments
Future
debt payments as of June 30, 2009 are (in thousands):
Year Ending
|
|
Debt
|
|
June 30,
|
|
Payments
|
|
|
|
|
|
2010
|
|
$
|
917
|
|
2011
|
|
|
1,000
|
|
2012
|
|
|
1,000
|
|
2013
|
|
|
1,000
|
|
2014
|
|
|
1,000
|
|
Thereafter
|
|
|
883
|
|
Total
|
|
$
|
5,800
|
|
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
8. WARRANTS
September
2005 Warrants
On
September 1, 2005, the Company raised $3.0 million and issued 360,000 four-year
detachable warrants to purchase the Company’s Common Stock at an exercise price
of $2.28 per share. During the year ended June 30, 2006, 284,160
warrants were exercised for gross proceeds of $647,885. At June 30,
2009, the warrant holders had a balance of 75,840 warrants available to exercise
into common shares. None of these remaining warrants were exercised
prior to their expiration on August 31, 2009.
February
2007 Warrants
On
February 15, 2007, the Company raised $3.3 million through a private placement
offering of its Common Stock and issued warrants to purchase 423,800 shares of
the Company’s Common Stock at an exercise price of $1.52 per
share. In addition, the placement agent received additional warrants
to purchase 130,955 shares of the Company’s Common Stock at an exercise price of
$1.90 per share. The warrants will terminate on the earliest of the
fourth anniversary of the offering closing date or the week after the Common
Stock trades at 200% of the exercise price for twenty consecutive
days. As of June 30, 2009, these warrants remain
outstanding.
August
2007 Warrants
In
conjunction with the August 8, 2007 promissory notes and equity offering,
further described in Note 7 – Long-Term Debt and Note 9 – Shareholders’ Equity,
the Company issued four-year detachable warrants to the noteholders to purchase
39,528 shares of the Company’s Common Stock at an exercise price of $1.752 per
share. In addition, the placement agent received additional warrants
to purchase 39,526 shares of the Company’s Common Stock at an exercise price of
$1.752 per share. As of June 30, 2009, these warrants remain
outstanding.
9. SHAREHOLDERS’
EQUITY
On August
8, 2007, the Company sold $11.8 million in debt and equity securities (the
“August 2007 Offering”). The Company used a portion of the proceeds
to satisfy the balance of its outstanding secured promissory notes issued on
August 29, 2003, January 25, 2005 and September 1, 2005,
respectively.
In the
August 2007 Offering, the Company issued 853,869 shares of Common Stock (the
“Shares”), which consisted of 790,542 sold to a group of investors and 63,327
issued to the placement agent for transaction
costs. Additionally, the Company sold 39,528 four year warrants
to purchase Common Stock at $1.752 per share (the “Warrants”) to the group of
investors. The Shares and Warrants were sold at $1.48 per Share and
one twentieth of a Warrant, or $29.60 for twenty (20) Shares and one (1)
Warrant, for net equity proceeds of $1.2 million. The Company
incurred transaction costs of $639,000 of which $123,000 were recorded to equity
and $516,000 to debt, allocated on a percentage basis. Included in
these transaction costs were commissions of $400,000 paid to the placement agent
for the offering, $94,000 of which was paid through the issuance of the 63,327
shares of our Common Stock at the offering price of $1.48 per share, along with
39,528 warrants with the same terms as the Warrants sold to
investors.
On
February 29, 2008, the Company sold 4,587 shares of Series A Preferred Stock,
$0.01 par value (the “Series A Preferred Stock”) at $550 per share for an
aggregate of $2.5 million (the “February 2008 Offering”). In the
February 2008 offering, the holders of the November 2007 Notes exchanged the
entire $2.0 million principal balance of those Notes, plus $6,000 of the accrued
but unpaid interest thereon, into 3,648 shares of Series A Preferred
Stock. Also in the February 2008 offering, the Company sold 939 of
the shares for $516,000 in cash to a small group of investors, including 155
shares sold for an aggregate of $85,000 to certain Company
officers.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
On March
12, 2008, the Company sold 1,985
shares of Series B
Convertible Preferred Stock, $0.01 par value (the “Series B Preferred Stock”) at
$900 per share for an aggregate of $1.8 million (the “March 2008
Offering”). In the March 2008 offering, some of the holders of the
August 2007 Notes exchanged $1.75 million in principal balance of the 11½%
senior secured convertible promissory notes issued by the Company, plus $37,000
of the accrued but unpaid interest thereon.
On August
15, 2008, the Company issued, in a private offering to accredited investors,
$148,850 in equity securities, consisting of 229 shares of Series C Convertible
Preferred Stock, $0.01 par value, at a price of $650 per share (the “Series C
Preferred Stock”).
In
September 2008 and January 2009, the holders of an aggregate of 382 and 91
shares of the Company’s Series A Preferred Stock, respectively, elected to
convert those shares at the 1 to 1000 conversion ratio set by the Certificate of
Designation for the Series A into an aggregate of 382,000 and 91,000 shares of
the Common Stock, respectively.
On June
29, 2009, as part of the Company’s recapitalization described in Note 4 –
Recapitalization, the August 2007 Notes and the September 2008 Notes were
extinguished with a portion of preferred stock as:
|
|
Amount
|
|
|
Preferred Stock
|
|
|
|
(in thousands)
|
|
|
Series D Issued (Shares)
|
|
To
extinguish a portion of the August 2007 Notes
|
|
$
|
1,166
|
|
|
|
2,916
|
|
To
extinguish a portion of the September 2008 Notes
|
|
|
125
|
|
|
|
312
|
|
Total
|
|
$
|
1,291
|
|
|
|
3,228
|
|
The
Preferred Stock Series D were issued at $400 per share. Each
preferred share is convertible into 1,000 shares of Common Stock at $0.40 per
share.
Also on
June 29, 2009, to complete the extinguishment of the Company’s existing debt,
and the exchange of the Preferred Stock Series A, B, and C, as described in Note
4 – Recapitalization, the Company issued the following number of shares of
Common Stock:
|
|
Amount
|
|
|
Common
|
|
|
|
(In thousands)
|
|
|
Stock Issued (Shares)
|
|
To
extinguish a portion of the August 2007 Notes
|
|
$
|
2,026
|
|
|
|
5,330,658
|
|
To
extinguish a portion of the September 2008 Notes
|
|
|
475
|
|
|
|
1,249,999
|
|
To
extinguish 4,114 shares outstanding of Preferred Stock Series
A
|
|
|
2,262
|
|
|
|
5,954,476
|
|
To
extinguish 1,985 shares outstanding of Preferred Stock Series
B
|
|
|
1,787
|
|
|
|
4,701,317
|
|
To
extinguish 229 shares outstanding of Preferred Stock Series
C
|
|
|
149
|
|
|
|
391,711
|
|
Total
|
|
$
|
6,699
|
|
|
|
17,628,161
|
|
The
common shares were issued at $0.38 per share, which was $0.01 higher than the
closing market bid price of the day prior to the transaction
date.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Prior to
the Recapitalization, the holders of the Preferred Stock had the right to
convert each share of the preferred stock into 1,000 common shares at $0.55,
$0.90, and $0.65 for the Series A, Series B and Series C,
respectively. As a result of the Recapitalization, the Company
redeemed all the outstanding preferred shares Series A, Series B, and Series C
through the issuance of an aggregate of 11,047,504 common shares at the
negotiated price of $0.38 per share, which was an amount lower than the original
terms of the securities. As per EITF No. D-42, “The Effect on the
Calculation of Earnings per Share for the Redemption or Induced Conversion of
Preferred Stock,” the Company reported the fair value of the additional
securities issued to the preferred shareholders as a non-cash deemed dividend of
$1.75 million which was a calculation of the difference between the
6,328,000 common shares that would have been issuable under the conversion
rights that existed in the convertible preferred shares at a weighted average
price of $0.66 and the 11,047,504 common shares issued at $0.38 cents upon the
redemption exchange times the market price on the conversion date.
Also in
the Recapitalization, the Company extinguished a portion of the August 2007 and
the September 2008 Notes (“the Notes”) through the issuance of 5,330,658 shares
and 1,249,999 shares of Common Stock, respectively, at the negotiated price of
$0.38 per share, which was higher than the $0.37 per share closing bid price on
the trading day immediately preceding the June 29, 2009
Recapitalization. The original terms of the Notes allowed for a
conversion of 50% of the August 2007 Notes and 100% of the September 2008 Notes
into common stock. The negotiated issuance price of $0.38 per share
in the Recapitalization was based on then current market prices, and it was
lower than the original conversion prices of $1.46 per share and $0.65 per share
of the August 2007 Notes and the September 2008 Notes,
respectively. Since the extinguishment of the Notes through issuance
of Common Stock was done at close to current market prices of the Common Stock,
the Company issued an aggregate of 4,462,456 more shares than it would have
issued for the convertible equivalent under the original terms of the
Notes.
Statement
of Financial Accounting Standards No. 84, “Induced Conversion of Convertible
Debt (as amended)” (“FAS No. 84”), specifies the method of accounting
for conversions of convertible debt to equity securities when the debtor induces
conversion of the debt by offering additional securities or other consideration
to convertible debt holders. In accordance with FAS No. 84, an
expense is recognized if and to the extent that “additional consideration is
paid to debt holders for the purpose of inducing prompt conversion of the debt
to equity securities (sometimes referred to as a convertible debt
‘sweetener’).” While the Company’s purpose in effecting the June 2009
Recapitalization was to effect a complete restructuring of its debt and equity
structure via a series of transactions that would have the effect of reducing
its outstanding debt and future obligations and there was no intent to induce
any conversion of the outstanding debt to common stock, a portion of the
exchange of the outstanding carrying value of $9.6 million in
convertible debt for an equal aggregate value of cash, common stock and
preferred stock is required by FAS No. 84 to be accounted for as an induced
conversion of outstanding debt securities. While we believe that the
application of FAS No. 84 does not reflect the economic substance of the value
exchanged in this portion of the Recapitalization transaction, we have reported
the required non-cash charge of approximately $1.65 million for the difference
between the number of common shares issued compared to the number of common
shares that would have been issued under the original terms of the convertible
debt instrument, times the market price on the conversion date.
The
Company understands that the accounting interpretation of FAS No. 84 is that an
inducement occurs any time additional shares are issued in the extinguishment of
convertible debt regardless of the absence of an economic loss or intent of the
parties to the transaction. As a result, the application of FAS No.
84 to the exchange of existing convertible debt securities for common stock
resulted in the recording of a non-cash “inducement” accounting charge of $1.65
million, which was a calculation of the difference between the 2,118,201 common
shares that would have been issuable to the applicable note holder under the
original conversion rights that existed in the convertible Notes and the
6,580,657 common shares exchanged at $0.38 cents upon the
extinguishment. The shares amounts include the impact of the July 6,
2009 transaction as describe in Note 15 – Subsequent Events. This
non-cash charge is deemed a financing expense to extinguish the Notes and it is
included in the Consolidated Statements of Operations with a corresponding
increase in Additional paid-in capital and therefore the net impact has no
effect to total Shareholder’s Equity.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
The
Company incurred $770,000 in fees related to the Recapitalization, of which
$267,000 were recorded to equity and $503,000 as debt issuance
costs. The placement agent received $380,000 in fees, with an
estimated fair value of $377,000, which were paid in cash and securities,
consisting of $280,000 in cash and shares of Common Stock. For the
securities, a total of 263,156 shares of Common Stock were issued on June 29,
2009, priced at $0.38, the same price used for the Common Stock issued
pursuant to the exchange agreements of June 29, 2009. These
securities had a fair value of $97,000 since the closing bid market price was
$0.37, lower than the issuance price of $0.38.
Certificates
of Designation of Preferred Stock
The
Company filed with the Secretary of State of Delaware the Certificates of
Designation of the Series A, Series B, Series C, and Series D Convertible
Preferred Stock (the “Certificates”). The Certificates authorize the
issuance of up to 10,000, 2,000, 2,000 and 5,000 shares of Series A, Series B,
Series C, and Series D Preferred Stock (the “Preferred Stock”), respectively,
which have such rights, qualifications, limitations and restrictions as are set
forth in the Certificates. Because of the June 29, 2009, Recapitalization, there
are no longer any outstanding shares of Series A, B or C Preferred,
but the Company’s Board of Directors retains the right to issue any of the
authorized but unissued shares of such Series, including the reissuance of
shares that were previously issued, cancelled or redeemed.
The
Preferred Stock ranks senior to the Common Stock as to both the payment of
dividends and the distribution of assets. The Preferred Stock is on
parity and will be on parity with the holders of any other series of preferred
stock that may be issued in the future. Upon liquidation, dissolution
or winding up of the Company, holders of the Preferred Stock are entitled to be
paid out of the assets of the Company an amount per share of the Preferred Stock
equal to the greater of: (i) the original issue price of the Preferred Stock,
plus all accumulated but unpaid dividends; or (ii) the fair market value of the
Preferred Stock on an as-converted to Common Stock basis, plus all accumulated
but unpaid dividends. If upon liquidation, the assets of the Company
are insufficient to make payment in full, then such assets will be distributed
ratably in proportion to the full amounts to which each Preferred Stockholder
would have been entitled. Each holder of the Preferred Stock is
entitled to one vote per share of Preferred Stock at each meeting of
shareholders of the Company with respect to any and all matters presented to the
shareholders of the Company.
Each
share of Series D Preferred Stock is currently convertible, at the option of the
holder, into 1,000 shares of Common Stock based on a conversion price equal to
$0.40 per share of Common Stock. If and when issued, each share of
Series A, B and C Preferred would be convertible into 1,000 shares of Common
Stock at a conversion price equal to $0.55, $0.90 and $0.65,
respectively. All of the conversion prices of the Preferred Stock are
subject to adjustment for stock dividends, stock splits and other similar
recapitalization events.
In
addition, if and when issued, shares of Series A, Series B, and Series C,
respectively, would automatically be converted into shares of Common Stock,
based on the then-effective conversion price, if:
|
(A)
|
the
closing price of the Common Stock on the primary trading market for the
Common Stock were equal to or greater than two times the conversion price
then in effect for such Series (the “Automatic Conversion Price”),
for twenty (20) consecutive business days,
or
|
|
(B)
|
upon
the election of sixty-six and two-thirds percent (66 2/3%) of the
outstanding shares of the applicable Series,
or
|
|
(C)
|
upon
a firmly underwritten, SEC registered, public offering of Common Stock by
the Company at a price per share price is at least two times
the Automatic Conversion Price of the applicable Series with gross
proceeds of at least ten million dollars
($10,000,000).
|
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
For the
Series A Preferred Stock, the automatic conversion would also occur upon the
closing of an Acquisition or an Asset Transfer (as these terms are defined in
the Series A Certificates) that results in the holders of the Series A Preferred
Stock receiving cash consideration per share not less than the Series A
Automatic Conversion Price. The Company has no automatic conversion
rights on the Series D Preferred Stock. There are no corresponding
automatic conversion provisions for the Series D Preferred.
The
Company may redeem any of the Preferred Stock at any time, upon ten (10) days
notice, by payment of the original issue price plus any accumulated but unpaid
dividends. In the event of a partial redemption, the Company is not
required to redeem the shares held by various shareholders on a pro rata or
similar basis but may select, in its sole discretion, which shares to
redeem.
Dividends
are payable on the Preferred Stock in cash when, as and if declared by the Board
of Directors, but only out of funds that are legally available. The
dividend rate for the cumulative dividends on the Series A, B and C Preferred
was eighteen percent (18%) per annum of the Original Issue Price until the
Company achieved positive Earnings Before Interest, Taxes, Depreciation and
Amortization for two consecutive fiscal quarters, when the rate was changed to
twelve percent (12%) in December 2008. Cumulative Dividends on the
Series D Preferred Stock are payable when, as and if declared by the Board of
Directors, but only out of funds that are legally available, at the rate of 5.5%
per annum of the sum of the Original Issue Price per share, in cash or, under
specified circumstances, in the form of shares of a new class of Preferred Stock
that is substantially identical to the Series D Preferred except that it shall
be nonvoting (“New Preferred Stock”), if the Company so elects. In
particular, during the first year following the original issuance of the Series
D Preferred on June 29, 2009, the Company may elect to pay dividends of the
Series D Preferred in New Preferred Stock and in subsequent years, the Company
may so elect only if its principal lender at the time has directed or advised
the Company not to pay a dividend in cash. The first dividend for the
Series D Preferred Stock would be payable, in cash or New Preferred Stock, in
August 2010, and on or about July 15 in subsequent years. Dividends
on Preferred Stock are cumulative from the date of the original issuance of the
Preferred Stock. Accumulated unpaid dividends on Preferred Stock do
not bear interest.
During
fiscal 2009, the Company declared $577,000 in cumulative dividends on the Series
A, Series B, and Series C Preferred Stock, all of which were paid or satisfied
as of June 30, 2009. Prior to the final satisfaction of all dividend
obligations on the Series A, B and C Preferred Stock on June 29, 2009, the
Company entered into an agreement with the holders of the Series A, Series B,
and Series C Preferred Stock on May 5, 2009, to satisfy the dividends due for
the quarters ended December 31, 2008, and March 31, 2009, through the issuance
of unregistered shares of the Common Stock valued at $0.23 per
share. The Company issued a total of 1,111,091 shares of Common Stock
to the holders of Series A, B and C Preferred in lieu of paying the $256,000 in
cash dividends accumulated during the quarters ended December 31, 2008, and
March 31, 2009.
On
June 29, 2009, the Company and the holders of the Series A, Series B, and Series
C Preferred agreed to satisfy the dividends due for the quarter ended June 30,
2009 through the issuance of shares of Common Stock of the
Company. For purposes of determining the number of shares to be
issued for the unpaid dividends, shares were valued at $0.38 per share, which
was higher than the $0.37 closing bid price on the Nasdaq Stock Market on the
preceding trading day. The Company issued 330,519 shares of Common
Stock to the holders of Series A, B and C Preferred in lieu of paying the
$126,000 in cash dividends accumulated during the quarter ended June 30,
2009.
Issuance
of Common Shares for Payment of Interest and Deferral Fee for August 2007 and
September 2008 Notes
In
January 2009, the Company issued 158,328 unregistered shares to Holders of the
August 2007 Notes, either as part of the deferral fee or for conversion of the
payment of unpaid interest on the August 2007 Notes. See Note 7 –
Long-Term Debt
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
In March
2009, the Company issued 12,499 unregistered shares of the Company’s Common
Stock to the Holders of the September 2008 Notes as part of the deferral fee on
the interest on the September 2008 Notes. See Note 7 –
Long-Term Debt.
In June
2009, the Company issued 1,292,439 unregistered shares of the Company’s Common
Stock to the Holders of the August 2007 and September 2008 Notes as part of the
Recapitalization in lieu of the payment of $490,000 in outstanding
interest. See Note 7 – Long-Term Debt.
Employee
Stock Options
The
Company has two employee option plans, the “1996 Plan” and the “2000
Plan”. The purpose of the 1996 Plan and the 2000 Plan is to
provide an incentive to attract, motivate and retain qualified competent
employees whose efforts and judgment are important to the Company’s success
through the encouragement of the ownership of stock by such
persons.
Under the
1996 Plan, 500,000 shares of Common Stock were reserved for issuance upon
exercise of options granted. Since the Board of Directors has
determined that no additional options will be granted under the 1996 Plan, no
options to purchase shares of stock are available to be granted under this
plan. Options granted under the 1996 Plan expire no later than ten
years from the date of grant. As of June 30, 2009, the 1996 Plan has
19,500 shares outstanding, all of which are fully vested and have a weighted
average exercise price of $7.63 and a weighted average remaining contractual
life of 0.25 years.
Under the
2000 Plan, 2,500,000 shares of Common Stock are reserved for issuance to
employees, including officers and directors, consultants and non-employee
directors upon the exercise of options. Options granted under the 2000 Plan
generally vest over three years of continuous service and expire no later than
ten years from the date of grant. As of June 30, 2009, options to
purchase 927,200 shares of stock were available to be granted under the 2000
Plan.
While the
Company has historically granted options under the 2000 Plan only to employees
of the Company and its subsidiaries, when the shares reserved for the Directors
Plan (discussed below) were exhausted in July 2008, the Compensation Committee
resolved to make the automatic grants of fully vested options to non-employee
members of the Board of Directors from the 2000 Plan until such time as there
were additional shares available to resume such automatic grants under the
Directors Plan. On November 20, 2008, the stockholders approved an
increase in the amount of shares of Common Stock reserved for issuance under the
Directors Plan to 500,000.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
The
following table summarizes the stock option transactions under both plans
discussed above:
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
Average
|
|
|
Aggregate
|
|
|
|
|
|
|
Average
|
|
|
Remaining
|
|
|
Intrinsic
|
|
|
|
1996 and
|
|
|
Exercise
|
|
|
Contractual
|
|
|
Value
|
|
|
|
2000 Plans
|
|
|
Price
|
|
|
Term
|
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2008
|
|
|
1,647,452
|
|
|
$
|
1.78
|
|
|
|
5.28
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
19,000
|
|
|
$
|
0.33
|
|
|
|
|
|
|
|
|
|
Cancelled
|
|
|
147,552
|
|
|
$
|
3.16
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2009
|
|
|
1,518,900
|
|
|
$
|
1.62
|
|
|
|
4.24
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
|
1,301,100
|
|
|
$
|
1.68
|
|
|
|
3.57
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for future grant
(2000
Plan only)
|
|
|
927,200
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
weighted average grant date fair value of stock options granted during the years
ended June 30, 2009 and 2008, was $0.32 and $1.11, respectively. For
the years ended June 30, 2009 and 2008, there were no stock options
exercised.
As of
June 30, 2009, there was $136,000 of total unrecognized compensation cost
related to unvested share options granted under the plans. That cost
is expected to be recognized over a weighted-average period of 1.1
year.
The
following table summarizes information about stock options outstanding under
both plans as of June 30, 2009:
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
|
Number
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
|
of Shares
|
|
|
Exercise
|
|
Price
|
|
|
Outstanding
|
|
|
Life (years)
|
|
|
Price
|
|
|
Exercisable
|
|
|
Price
|
|
$
.00 to $0.94
|
|
|
|
32,000
|
|
|
|
9.16
|
|
|
$
|
0.50
|
|
|
|
14,000
|
|
|
$
|
0.43
|
|
$ .95
to $1.89
|
|
|
|
1,322,400
|
|
|
|
3.93
|
|
|
$
|
1.44
|
|
|
|
1,122,600
|
|
|
$
|
1.45
|
|
$1.90
to $2.84
|
|
|
|
74,500
|
|
|
|
6.30
|
|
|
$
|
2.49
|
|
|
|
74,500
|
|
|
$
|
2.49
|
|
$2.85
to $3.79
|
|
|
|
70,500
|
|
|
|
6.66
|
|
|
$
|
3.04
|
|
|
|
70,500
|
|
|
$
|
3.04
|
|
$7.60
to $8.54
|
|
|
|
19,500
|
|
|
|
0.25
|
|
|
$
|
7.63
|
|
|
|
19,500
|
|
|
$
|
7.63
|
|
Total
|
|
|
|
1,518,900
|
|
|
|
|
|
|
|
|
|
|
|
1,301,100
|
|
|
|
|
|
The fair
value of the stock options that vested was $404,000 and $394,000 in fiscal year
2009 and 2008, respectively.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Director
Stock Options
In May
2001, the Company adopted a separate stock option plan for non-employee members
of the Company’s Board of Directors (the “Directors’ Plan”). The
purpose of the Directors’ Plan is to provide an additional incentive to attract
and retain qualified competent directors upon whose efforts and judgment are
important to the Company’s success through the encouragement of the ownership of
stock by such persons.
Under the
Directors’ Plan, 500,000 shares of Common Stock are reserved for issuance upon
the exercise of options granted. Each non-employee who serves as a
member of the Company’s board of directors as of the effective date of the
Directors’ Plan, and each non-employee who is elected or otherwise appointed as
one of the Company’s directors thereafter, will receive a fully vested option to
purchase 20,000 shares of stock. On the last day of each fiscal
quarter while the Directors’ Plan is in effect, each non-employee director will
receive an additional grant of an option to purchase 1,500 shares of
stock. Further, in accordance with the Directors’ Plan, additional
options may be granted to non-employee directors from time to
time. Options to purchase 376,650 shares of Common Stock are
outstanding at June 30, 2009 under the Directors’ Plan and 123,350 shares of
stock are available to be granted in the future.
Options
granted under the Directors’ Plan expire no later than ten years from the date
of grant and are, with limited exceptions, exercisable as of the grant
date. All outstanding options under the Directors’ Plan as of June
30, 2009 are fully vested.
The
following table summarizes the stock option activity under the Directors’ Plan
for the periods indicated:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
Average
|
|
Aggregate
|
|
|
|
|
|
Average
|
|
Remaining
|
|
Intrinsic
|
|
|
|
|
|
Exercise
|
|
Contractual
|
|
Value
|
|
|
|
2001 Plan
|
|
Price
|
|
Term
|
|
(In Thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2009
|
|
349,650
|
|
$
|
1.66
|
|
5.31
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
27,000
|
|
$
|
0.25
|
|
|
|
|
|
|
Cancelled
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
Exercised
|
|
-
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at June 30, 2009
|
|
376,650
|
|
$
|
1.56
|
|
4.70
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable
|
|
376,650
|
|
$
|
1.56
|
|
4.70
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Available
for future grant
|
|
123,350
|
|
|
|
|
|
|
|
|
|
The
weighted average grant date fair value of Directors’ stock options granted
during the years ended June 30, 2009 and 2008, was $0.22 and $0.77,
respectively. For the years ended June 30, 2009 and 2008, there were
no stock options exercised.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
The
following table summarizes information about the Directors’ stock options
outstanding under the Plan as of June 30, 2009:
|
|
|
Options Outstanding and Exercisable
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
Weighted
|
|
|
|
|
|
|
|
Remaining
|
|
|
Average
|
|
Exercise
|
|
|
Number
|
|
|
Contractual
|
|
|
Exercise
|
|
Price
|
|
|
of Shares
|
|
|
Life (years)
|
|
|
Price
|
|
$0.00
to $0.94
|
|
|
|
54,125
|
|
|
|
8.95
|
|
|
$
|
0.51
|
|
$0.95
to $1.89
|
|
|
|
255,100
|
|
|
|
3.32
|
|
|
$
|
1.50
|
|
$1.90
to $2.84
|
|
|
|
59,925
|
|
|
|
6.51
|
|
|
$
|
2.55
|
|
$2.85
to $3.80
|
|
|
|
7,500
|
|
|
|
6.38
|
|
|
$
|
3.30
|
|
Total
|
|
|
|
376,650
|
|
|
|
|
|
|
|
|
|
The fair
value of the stock options that vested was $6,000 and $25,000 in fiscal year
2009 and 2008, respectively.
For the
year ended June 30, 2009 and 2008, the Company recorded amortization of stock
compensation expense, with a correlating increase to shareholder’s equity, in
the amount of $292,000, and $504,000, respectively.
11.
|
SIGNIFICANT
CUSTOMERS AND VENDORS
|
In fiscal
year 2009, revenue from one customer accounted for 10% of the Company’s
consolidated petroleum product revenues. In fiscal year 2008, no
single customer had revenues over 10%.
During
fiscal years 2009 and 2008, the Company had two and three vendors, respectively,
that each year represented more than 10% of cost of sales under a non
contractual, at will business arrangement which can be terminated by either
party at any time. The vendors accounted for 47%, and 43%, of total
cost of sales during fiscal years 2009 and 2008, respectively.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
The
components of the provision for federal and state income taxes are summarized as
follows (in thousands):
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Current:
|
|
|
|
|
|
|
State
|
|
$
|
(32
|
)
|
|
$
|
-
|
|
Income
tax provision
|
|
$
|
(32
|
)
|
|
$
|
-
|
|
The
actual tax benefit of the Company for the years ended June 30, 2009 and 2008
differs from the statutory Federal tax rate of 34%, due to the following (in
thousands):
|
|
Year Ended June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Expected
benefit for income taxes at the statutory Federal income tax rate of
34%
|
|
$
|
784
|
|
|
$
|
2,301
|
|
Deferred
tax valuation allowance
|
|
|
494
|
|
|
|
(1,843
|
)
|
State
income taxes, net of federal benefit
|
|
|
21
|
|
|
|
12
|
|
Effect
of FIN 48
|
|
|
34
|
|
|
|
(360
|
)
|
Net
operating loss carryforward adjustment
|
|
|
(345
|
)
|
|
|
43
|
|
Other,
net
|
|
|
-
|
|
|
|
15
|
|
Change
in tax rate
|
|
|
38
|
|
|
|
95
|
|
Nondeductible
expenses
|
|
|
(1,058
|
)
|
|
|
(263
|
)
|
Benefit
(provision) for income taxes
|
|
$
|
(32
|
)
|
|
$
|
-
|
|
Deferred
income taxes reflect the net effects of temporary differences between the
carrying amounts of assets and liabilities for financial reporting purposes and
their income tax bases, and operating loss carryforwards.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
The tax
effects of temporary differences and net operating loss carryforwards that give
rise to significant portions of the deferred tax assets and liabilities at June
30, 2009 and 2008 are presented below (in thousands):
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Deferred
tax assets:
|
|
|
|
|
|
|
Net
operating loss carryforwards
|
|
$
|
10,693
|
|
|
$
|
11,259
|
|
Reserves
and allowances
|
|
|
365
|
|
|
|
435
|
|
Intangible
assets
|
|
|
211
|
|
|
|
159
|
|
Stock-based
compensation expense
|
|
|
679
|
|
|
|
602
|
|
Accrued
expenses and deferred income
|
|
|
175
|
|
|
|
386
|
|
Other
|
|
|
69
|
|
|
|
55
|
|
|
|
|
|
|
|
|
|
|
Total
gross deferred tax assets
|
|
|
12,192
|
|
|
|
12,896
|
|
|
|
|
|
|
|
|
|
|
Less: valuation
allowance
|
|
|
(10,333
|
)
|
|
|
(10,827
|
)
|
|
|
|
|
|
|
|
|
|
Total
deferred tax assets
|
|
|
1,859
|
|
|
|
2,069
|
|
|
|
|
|
|
|
|
|
|
Deferred
tax liabilities:
|
|
|
|
|
|
|
|
|
Property
and equipment
|
|
|
(1,859
|
)
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
|
Total
deferred tax liabilities
|
|
|
(1,859
|
)
|
|
|
(2,069
|
)
|
|
|
|
|
|
|
|
|
|
Net
deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
Realization of deferred tax assets is
dependent upon generating sufficient taxable income in future periods. FAS No.
109 requires a valuation allowance to reduce the deferred tax assets reported,
if, based on management’s analysis, it is more likely than not, that some
portion or all of the deferred tax assets, will not be realized. After
consideration of all the information available, management has determined that a
$10.3 million and $10.8 million valuation allowance at June 30, 2009 and 2008,
respectively, is necessary to reduce the deferred tax assets to the amount that
will likely be realized.
As
required by the provisions of Financial Accounting Standards (“FAS”)
Interpretation No. 48, “Accounting for Uncertainty in Income Taxes”
(“FIN No. 48”), which
clarifies FAS No. 109, “Accounting for Income Taxes”, the Company recognizes the
financial statement benefit of a tax position only after determining that the
relevant tax authority would more likely than not sustain the position following
an audit. For tax positions meeting the more likely than not
threshold, the amount recognized in the financial statements is the largest
benefit that has a greater than 50 percent likelihood of being realized upon
ultimate settlement with the relevant tax authority.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
A
reconciliation of the beginning and ending amounts of unrecognized tax benefits
is as follows (in thousands):
|
|
June 30,
|
|
|
|
2009
|
|
|
2008
|
|
Balance
- beginning of period
|
|
$
|
777
|
|
|
$
|
847
|
|
Additions
based on tax positions related to the current year
|
|
|
16
|
|
|
|
12
|
|
Additions
for tax positions of prior years
|
|
|
-
|
|
|
|
57
|
|
Reductions
for tax positions of prior years
|
|
|
-
|
|
|
|
(54
|
)
|
Reductions
as a result of lapse of applicable statute of limitations
|
|
|
(34
|
)
|
|
|
(85
|
)
|
Balance
- end of period
|
|
$
|
759
|
|
|
$
|
777
|
|
At
June 30, 2009 and 2008, the amount of unrecognized tax benefits was
approximately $759,000 and $777,000 respectively, of which approximately
$326,000 and $360,000 would, if recognized, affect the Company’s effective tax
rate for each respective tax year.
The
Company recognizes accrued interest and penalties related to unrecognized tax
benefits in income taxes. The Company did not accrue any interest and
penalties for fiscal years 2009 and 2008 due to the existence of net operating
loss carryforwards.
The Company and/or its subsidiaries
file income tax returns in the U.S. federal jurisdiction and various states and
other local jurisdictions. The Company’s federal income tax returns
for years prior to June 30, 2005 are no longer subject to
examination. Returns for some state and local jurisdictions prior to
that date remain subject to examination but are not individually considered
material.
As of
June 30, 2009, the Company has net operating loss carryforwards for federal
income tax purposes of approximately $28.1 million, which will begin to expire
in the year 2012. The utilization of the net operating loss carry
forwards may be subject to the Internal Revenue Code Section 382 limitation
related to ownership changes. Additionally, the Company has state net
operating loss carryforwards which expire in varying years.
13.
|
COMMITMENTS
AND CONTINGENCIES
|
Operating
Leases
The
Company leases real property and equipment under operating leases that expire at
various times through fiscal year 2016. Rent expense amounted to $1.6
million for each of the years ended June 30, 2009 and 2008,
respectively. Certain leases contain escalation clauses and renewal
options.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Future
minimum lease payments under non-cancelable operating leases as of June 30, 2009
are (in thousands):
Year Ending
|
|
Operating Lease
|
|
June 30,
|
|
Payments
|
|
|
|
|
|
2010
|
|
$
|
1,049
|
|
2011
|
|
|
762
|
|
2012
|
|
|
498
|
|
2013
|
|
|
456
|
|
2014
|
|
|
61
|
|
Thereafter
|
|
|
17
|
|
Total
|
|
$
|
2,843
|
|
As a
result of the H & W acquisition in October 2005, the Company is obligated to
certain former owners of H & W, of which one was an officer of the Company,
under four operating leases covering property utilized for certain operating
facilities. Rent expense paid to the former owners was $261,000 for
each of the fiscal years ended June 30, 2009 and 2008. Future minimum
lease payments under these leases are $261,000 and $65,000 for the fiscal years
ended June 30, 2010 and 2011, respectively, as the leases expire on September
30, 2010.
Governmental
Regulation
Numerous
federal, state and local laws, regulations and ordinances, including those
relating to protection of the environment affect the Company’s
operations. The operation of the Company’s mobile fueling fleet and
its transportation of diesel fuel and gasoline are subject to extensive
regulation by the U.S. Department of Transportation (“DOT”) under the Federal
Motor Carrier Safety Act (“FMCSA”) and the Hazardous Materials Transportation
Act (“HMTA”).
These
laws may impose penalties or sanctions for damages to natural resources or
threats to public health and safety. Such laws and regulations may
also expose the Company to liability for the conduct of, or conditions caused by
others, or for acts of the Company that were in compliance with all applicable
laws at the time such acts were performed. Certain environmental laws
provide for joint and several liabilities for remediation of spills and releases
of hazardous substances. In addition, the Company may be subject to
claims alleging personal injury or property damage as a result of alleged
exposure to hazardous substances, as well as damage to natural
resources. These future costs are not fully determinable due to such
factors as the unknown magnitude of possible contamination, the unknown timing
and extent of the corrective actions that may be required, the determination of
the Company’s liability in proportion to other responsible parties, and the
extent to which such costs are recoverable from third parties.
Employment
Agreements
The
Company has entered into written employment agreements with certain officers and
employees. The agreements vary in length of term and may provide for
severance payments upon termination without cause or for automatic renewal for
successive periods unless notice of termination is given prior to a renewal
period.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
Litigation
The
Company and its subsidiaries are from time to time parties to legal proceedings,
lawsuits and other claims incident to their business activities. Such
matters may include, among other things, assertions of contract breach, claims
for indemnity arising in the course of the business and claims by persons whose
employment with us has been terminated. Such matters are subject to
many uncertainties, and outcomes are not predictable with
assurance. Consequently, management is unable to ascertain the
ultimate aggregate amount of monetary liability, amounts which may be covered by
insurance or recoverable from third parties, or the financial impact with
respect to these matters as of June 30, 2009. Therefore no
contingency gains or losses have been recorded as of June 30,
2009. However, based on management’s knowledge at the time of this
filing, management believes that the final resolution of such matters pending at
the time of this report, individually and in the aggregate, will not have a
material adverse effect upon the Company’s consolidated financial position,
results of operations or cash flows.
On
October 10, 2006, the Company commenced a civil action in Broward County,
Florida Circuit Court against Financial Accounting Solutions Group, Inc.
(“FAS”), Kramer Professional Staffing, Inc. (“KPS”), and Mitchell Kramer, an
officer, director, shareholder and control person of FAS and KPS (“Kramer”),
alleging that Kramer, FAS and KPS (collectively, the “Defendants”) induced the
Company to engage FAS to provide services with respect to (a) the implementation
of certain Information Technology (“IT”) functions; (b) the modernization and
expansion of the Company’s accounting and business technology capabilities, and
(c) compliance with public company accounting requirements and the
Sarbanes-Oxley Act (the “IT Projects”) by making numerous misrepresentations
concerning the experience, capabilities and background of FAS and FAS’
personnel. FAS subsequently filed a countersuit in the same court
seeking payment of additional fees allegedly due from the
Company. The court is jointly administering the countersuit with the
Company’s action. The Company amended its complaint to add Alex
Zaldivar, the managing director and a principal of FAS, as an additional
Defendant and to make new claims for accounting malpractice, negligent IT
implementation, negligent training and supervision, negligent placement and
breach of fiduciary duty against the Defendants. The case is
currently in the discovery stage, and is tentatively scheduled for a nonbinding
mediation session on October 12, 2009. The amount of damages recoverable
from the Defendants in this action will depend on a number of factors, including
but not limited to the costs incurred by the Company in completing the IT
Projects, the amount of consequential damages suffered by the Company as a
result of the delays and poor performance by FAS in implementing the IT
projects, potential counterclaims or countersuit by FAS for amounts billed to
the Company which the Company has refused to pay, and the assessment by the
Company, based on input from the new vendor engaged by the Company to replace
FAS, of the estimated costs to complete the IT Projects. The Company
believes that, based on all available information, the likelihood of FAS
prevailing in any litigation against the Company is remote and the chance of
recovery by FAS against the Company is slight.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
By the
filing of a Demand for Arbitration with the American Arbitration Association in
Broward County, Florida on May 26, 2009, the Company brought claims against
various members of the Harkrider family arising out of the October 1, 2005,
purchase of H & W Petroleum Company, Inc. (“H & W”) from the Harkrider
family and H & W’s purchase of certain assets of Harkrider Distributing
Company, Inc. (“HDC”) immediately prior to the Company’s purchase of H &
W. In that action, Case No. 32 198 Y 00415 09 (the “Arbitration”),
the Company and H & W, which is now the Company’s wholly owned subsidiary,
sought damages for breaches of, and indemnification under, the October 1, 2005,
Stock Purchase Agreement between various Harkrider family members and the
Company and under the September 29, 2005, Asset Purchase Agreement between HDC
and various members of the Harkrider family, on the one hand, and H & W on
the other, along with various other claims arising from the
transaction. Also on May 26, 2009, H & W filed a second action
against various members of the Harkrider family in the District Court in Harris
County, Texas, Civil Action No. 2009-32909 (the “Harris County Action”), seeking
damages and declaratory relief for various breaches of H & W's lease of its
Houston, Texas, facility by H & W’s landlord, the Harkrider Family
Partnership, and other related claims. On June 24, 2009, the parties
to the Arbitration and the Harris County Action agreed that all of the claims
brought in the Arbitration would be dismissed and all of those claims would be
added to the Harris County Action. On June 29, 2009, in accordance
with the stipulation of the parties to consolidate the Arbitration with the
Harris County Action, the American Arbitration Association closed the
Arbitration. The Harris County Action is currently in the discovery
phase.
14.
|
RELATED
PARTY TRANSACTIONS
|
The
Company paid $80,000 and $79,000 pursuant to ordinary commercial terms, for each
of the years ended June 30, 2009 and 2008, to a provider of investor relations
and public relations services whose Chief Executive Officer is a member of the
Company’s Board of Directors.
The
Company is obligated to certain former owners of H & W under four operating
leases which expire in September 30, 2010 covering property utilized for certain
of the Company’s operating facilities. See Operating Leases in Note
13 – Commitments and Contingencies. While these leases were
negotiated at arms’ length prior to the acquisition of H & W, after the
acquisition, one of the former owners of H & W who leased the facilities to
the Company was employed as an officer of, and then a consultant to the Company,
until November 10, 2008.
The
Company’s officers and directors that participated in the Company’s private
offerings of the Series A Preferred Stock and Existing Unsecured Notes also
participated in the Recapitalization. See Note 4 –
Recapitalization.
SMF
ENERGY CORPORATION AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS –
Continued
In July
of 2009, the Company was informed by two previous holders (the “Holders”) of the
August 2007 Notes that, notwithstanding the terms of their original Exchange
Agreements, they had intended to exchange more of their August 2007 Notes for
shares of Common Stock than was reflected in their Original Exchange
Agreements. Accordingly, in response to a request from the Holders to
remedy their mistake, on July 6, 2009, the Company entered into two additional
Exchange Agreements (the “New Exchange Agreements”) with the Holders by which
the Holders exchanged 824 shares of Series D Preferred Stock for an aggregate of
867,056 shares of the Common Stock based on an aggregate value of
$329,000. The New Exchange Agreements provided the Holders with the
terms originally offered to them in the Recapitalization, including the $0.38
price per share of Common Stock, rather than the $0.40 conversion price that
would have been available to them upon a conversion of the Series D Preferred
Stock that they received in the Recapitalization. The $0.38 price
used in the New Exchange Agreements was not less than the closing bid price for
the Common Stock on the Nasdaq Capital Market on the last trading day preceding
the July 6, 2009 New Exchange Agreements. The impact of these 166,484
shares is recorded with the $1.7 million non-cash FAS 84 inducement on
extinguishment of convertible notes in the financial statements for the year
ended June 30, 2009.
In July
and September 2009 some of the holders of the Series D Preferred Stock converted
an aggregate of 1,806 shares into 1,806,000 shares of Common Stock for an
aggregate value of approximately $722,000.
On
September 10, 2009, the exercise prices of all outstanding employee stock
options previously granted under the 2000 Plan were amended by the Compensation
Committee of the Company’s Board of Directors to have an exercise price of $0.55
per share (the “Amendment”). The new exercise price of $0.55 set by
the Amendment was $0.17 above the $0.38 official closing price on the Nasdaq
Capital Market on the trading day immediately preceding the date of the
Amendment. The Amendment did not change the vesting schedules or any
of the other terms of the respective stock options. As a result of
the repricing of the options by the Amendment, the Company will incur
approximately a $93,000 non-cash charge to compensation expense during the first
quarter of fiscal year 2010 and $5,000 amortized over the remaining vesting
period of the related options. This modification affects 31 employees
and 1,474,200 of the stock options outstanding on June 30, 2009.
On
September 10, 2009, the Company filed a Certificate of Amendment (the
“Amendment”) with the Delaware Secretary of State to amend the Company’s
Certificate of Incorporation. The Amendment, which will become effective on
October 1, 2009, will effect a 1-for-4.5 reverse stock split of the Company’s
common stock. As a result of the reverse stock split, every 4.5
shares of the Company’s issued and outstanding common stock will be combined
into 1 share of common stock. The reverse stock split will not change the number
of authorized shares of the Company’s common stock. No fractional
shares will be issued in connection with the reverse stock split. If, as a
result of the reverse stock split, a stockholder would otherwise hold a
fractional share, the number of shares to be received by such stockholder will
be rounded up to the next highest number of shares. Following the
reverse stock split, the Company expects to have approximately 8.56 million
shares of common stock outstanding. The reverse stock split will affect all
shares of the Company’s common stock, including common stock underlying stock
options, warrants, promissory notes and preferred stock that are outstanding
immediately prior to the effective time of the reverse stock
split. The accompanying financial statements do not reflect the
reverse stock split because the record date is after the financial statements
issuance date.
The
Company addressed the disclosure of subsequent events through the date of filing
of this Form 10K on September 28, 2009.
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